Your Tax Questions Answered - Part I
Recently I offered several webinars for family child care providers in Iowa sponsored by the Iowa Child Care Resource and Referral about the recent changes in tax laws affecting them. Here are some of the questions and answers from those webinars.
I am doing a series of webinars for state and local family child care organizations across the country. I can speak on record keeping and taxes, contracts and policies, marketing, legal and insurance issues and money management and retirement. If you are interested in having me do a webinar for your organization, contact Nicole Hopkinson at the National Association for Family Child Care: nhopkinson@nafcc.org.
Home Improvements
Q: How can I deduct a remodeled sun room that the daycare children use?
A: Any expense that costs less than $2,500 can be deducted in one year. If the expense is used by your family and your business, apply your Time-Space Percentage to the cost. If it costs more than $2,500 expenses can still be deducted in one year with the exception of a home, home improvement or home addition, all of which must be depreciated over 39 years. A room remodel is considered a home improvement and therefore it must be depreciated over 39 years. There are two exceptions to the rule that home improvements must be depreciated over 39 years.
Q: Is my driveway a land improvement or a home improvement? What’s the difference?
A: A driveway, like a patio or in-ground swimming pool or in-ground sprinklers are land improvements that are normally depreciated over 15 years. Under the new 100% bonus rule you can deduct the business portion of these expenses in one year. A home improvement is when you replace more than half your windows, more than half your flooring, remodeling a kitchen, new furnace, new central air conditioning, new addition, or new deck. Home improvements are depreciated over 39 years.
Q: If I replace the whole roof is this a repair or a home improvement?
A: If you just replace the shingles it’s a repair that canbe deducted in one year. If you replace the boards underneath the shingles it’sa home improvement.
Q: Does carpeting count as flooring? If I put in new carpet in three rooms, is that a repair?
A: Carpeting can always be deducted in one year as a repair.
Q: What happens if I’m still in business after claiming 39 years of depreciation?
A: Congratulations! Once you run out of the years when depreciating an item, you cannot claim any more deductions on it. If you stop using something you are depreciating or go out of business before the end of the depreciation, you don’t get to deduct the remaining years of depreciation.
Q: We are going to replace our forced air furnace and central air with a geo-thermal unit that will include heated water. How do I deduct it?
A: This can be deducted in one year.
Q: I installed a new counter top, back splash and microwave. Is the $3,136 for the counter top and back splash considered a home improvement?
A: No, this is a repair that can be deducted in one yearbecause you are not remodeling the entire kitchen.
Q: How do I deduct new siding on my home?
A: Treat it as a home improvement – 39 years.
Q: We bought all new kitchen appliances and washer and dryer. Is this a repair?
A: You can deduct the business portion of all of these costsin one year. Call it “equipment” and put it under Schedule C as an “OtherExpense.”
Q: Is a new wheelchair ramp count the same as a deck?
A: This is a home improvement – 39 years, same as a deck. Unless it cost less than $2,500 in which case you can deduct the business portion in one year.
Q: If I repair walls and repaint is this a repair or improvement?
A: Repair – 1 year.
Q: We added a second furnace that is not heating an area that is used for daycare. Can I deduct that on our taxes?
A: No, since you are not using this in your business.
Q: Can I deduct a $2,600 furnace in one year?
A: Yes.
Q: Can I use the 100% bonus depreciation rule on replacing concrete?
A: Yes. Claim on Form 4562, line 14. Concrete is not a home improvement,it’s a land improvement.
Q: I replaced my daycare flooring. Can I separate out the cost of labor and materials and deduct them without depreciation?
A: No, you must lump these expenses together as one item. Ifyou are replacing less than half the flooring of your home you can deduct thisin one year using the 100% bonus depreciation rule.
Q: How do I deduct a $5,400 sewer line to the street from my house? What about lead pipe removal?
A: Use the 100% bonus depreciation rule and deduct on Form4562, line 14 as a land improvement. Same with lead pipe removal.
Q: We added an addition for day care use. If we don’t complete it before 2020 and are not using it for daycare until 2020, how do we deduct these expenses?
A: This is a home improvement you must depreciate over 39years. Start claiming this in 2020.
Q: Should I repair or remodel anything in my home in 2019 with the new tax benefits? Should we spread it out over two years or do it all at once if we are financially able to?
A: In general, you want to claim deductions as soon as youcan. A deduction this year is worth more to you than a deduction next year inmost cases.
Q: Are these new tax laws available for all home-based businesses?
A: Yes.
Q: Can I deduct a large water heater and new water softener?
A: You can deduct the business portion in one year.
Q: If my home repairs began in 2018 and I’m not billed until 2019, when can I claim the deduction?
A: If you signed a contract for the work in 2018, you can deductthe expense in 2018. Otherwise claim in 2019.
Q: Should I “repair” each bathroom every year, not just all in the same year, so I can deduct each year?
A: If you remodel one of three bathrooms each year you can deduct the cost of the one bathroom in one year. If you remodel one of two bathrooms over two years you must treat them as a home improvement. The principle here is that remodeling less than half of your bathrooms can be treated as a repair and deducted in one year, but remodeling half or more of your bathrooms in one year must be treated as a home improvement.
Q: If I build a new playground in my back yard for the daycare and it costs $1,500, how do I deduct it?
A: Deduct it as “equipment” on Schedule C, as an “OtherExpense.”
Q: Is it an improvement if the expense was due to flooding?
A: If you are simply replacing items that were lost, treatit as a repair and deduct in one year. If you are significantly upgrading, thenit’s an improvement to be depreciated over 39 years.
Q: I have a hole in a portion of my roof. When I fixed it would this be a repair?
A: Yes.
Q: A pipe broke under the basement where I have my business. How can this be deducted?
A: Deduct as a repair on Form 8829, line 20..
Q: We put in all new windows and doors. Three of the windows are in bedrooms used exclusively for daycare. How do I deduct this?
A: Replacing less than half your windows or doors is arepair. Replacing more than half is a home improvement. Apply your Time-SpacePercentage to all the windows except those in the bedrooms used exclusively foryour business. Depreciate 100% of the cost of the windows in these bedrooms.
Q: I am remodeling my basement to be used for my business. How is this deducted? What if it takes five years to complete the project? When do I deduct it?
A: Deduct the business portion in one year. If you have expenses that continue past one year, claim them in the year you spend the money.
Q: We had a rotten wall due to incorrect building and will have to remove the brick and rebuild the wall costing $40,000. How can I deduct it?
A: It’s a repair so you can deduct the business portion in one year.
Q: We fixed our basement wall in 2018 for $6,100 and we also put in a new deck. How do we deduct this?
A: Deduct the basement wall as a repair and depreciate thenew deck as a home improvement.
Time-Space Percentage
Q: Should the garage, deck and basement storage areas be included in the total square feet of my home?
A: Yes.
Q: How do I keep track of hours children are not present in my home when I do other business activities?
A: Use a calendar and carefully track all these hours for two months each year. Then, use the average of these two months for the rest of the year.
Q: My Time-Space Percentage is about 49%. Is this normal?
A: It’s a little higher than the average, but that doesn’t mean you shouldn’t claim it. If you have the records to show how you arrived at 49%, don’t hesitate to claim it.
Q: Is a new washing machine deducted using my Time-Space Percentage?
A: Yes, assuming you use it for both business and personalpurposes.
Q: Can you give examples of business hours that I might not be aware of that we can include in the Time-Space Percentage? What about paid days off?
A: Cleaning, activity preparation, meal preparation, parentinterviews, parent phone calls, record keeping, time on the Internet,curriculum development, etc. Don’t count hours for paid days off unless you aredoing some business activities in your home.
Q: We are open 24 hours a day, five days a week. How do we calculate our Time-Space Percentage?
A: Count the hours children are present, not the hours youare open. Add to this the other hours you work in your home when children arenot present. Calculate the space you use in your home on a regular basis. Enterall of this information onto Part I of Form 8829 Expenses for Business Use ofYour Home.
Deductions
Q: I have a storage unit holds all my daycare toys that I’m not using at the time. Can I deduct 100% of this cost?
A: If the items in the storage unit are only use for yourbusiness, deduct 100% of the cost. Otherwise, apply your Time-Space Percentage.
Q: A provider put all of her $15,000 of expenses under Supplies on Schedule C. She was audited and her auditor told her that putting such a high amount on one line caused her to be audited. The provider couldn’t prove all of her Supply expenses and had to settle. Does this mean we shouldn’t lump expenses?
A: You can lump expenses on Schedule C. Just don’t lumpeverything onto one or two lines.
Q: Is there a list of items I can deduct in my business to see if I’ve overlooked something?
A:My book Family Child Care Record Keeping Guide lists over 1,000 allowable deductions.
Q: Can we deduct the cost of cutting down a rotten tree if we received grant money for it?
A: Yes. Report the grant money as income. Deduct the Time-SpacePercentage of the cost to cut down the tree as a repair.
Q: Our sewer backed up due to tree roots in the pipes. Can we deduct the cost of root removal?
A: Yes. Apply your Time-Space Percentage.
Q: How much can I deduct of my cell phone bill? What expense category should I put it under?
A: You can’t deduct the monthly bill of the first phone lineinto your home, whether it’s a land line or cell phone. You can deduct yourTime-Space Percentage or an actual business use percentage of a second or thirdline used in your business. Deduct this under Utilities on Form 8829.
Q: If I wear a uniform for child care can I deduct it?
A: A uniform is something that is not suitable to be worn outside your home. The only thing I can think of that meets this definition is scrubs. Therefore, you cannot deduct any clothing or shoes even if you only wear them during business hours, because you could wear them outside your home. If you have a shirt or sweater that has a day care message on it, then you can deduct it as advertising.
Q: I broke my foot during daycare and had to close for some days. Is any of this deductible?
A: Sorry to hear this. Unfortunately not.
Q: Can I deduct the cost of my tax preparer?
A: A new change in the tax law says you can no longer deductthe tax preparer fee to do your personal tax forms as an itemized deduction onSchedule A. You can deduct the fee associated with preparing your business taxforms (Schedule C, Form 8829, Form 4562, Schedule SE). Ask your tax preparer tobreak out the fee.
Q: We have to test our cat for diseases and that costs more than a normal check-up and shots. Can I deduct this? If so, where would I deduct the vet bill on my tax forms?
A: You could only deduct expenses for a dog or cat if youwere not required to pay the expense if you weren’t a provider. So, if thistest was required only because you were a family child care provider, then youcan deduct the cost. Put it under Supplies on Schedule C.
Q: If I buy a comfort dog would that be deductible?
A: No. The IRS considers cats and dogs a personal.
Q: The Quality First program requires a pet to get a high star rating. Shouldn’t we be able to choose a dog and deduct it?
A: Nope, it’s too personal according to the IRS.
Q: Can I deduct the cost of my lawn mowing service?
A: Yes, because it’s an “ordinary and necessary” expense foryour business. Apply your Time-Space Percentage.
Q: My own child is in a school band and we had repairs done to her instrument. Is this deductible? What about reeds for her instrument?
A: No, this is personal.
Q: How do I find out the per diem rate for food expenses when I traveled last year to Chicago for the National Association for the Education of Young Children conference?
A: The per diem rate for Chicago is $76. Here’s a link to find the rate for all cities.
Q: We had to replace all of our appliances because the electric company fried everything. How would we deduct this?
A: Deduct your Time-Space Percentage as “equipment” onSchedule C as an Other Expense.
Q: Can I deduct the insurance deductible we paid when we had a fire and the insurance paid for most of the cost?
A: Yes you can deduct your deductible and any other expensesyou paid out of your pocket. You can’t deduct what the insurance company paidfor.
Q: Can my husband deduct tools for his work if he is not self employed?
A: Only as a “non-reimbursed employee” expense on Schedule Aif you itemize. But, if you use these tools in your business you can deductyour Time-Space Percentage of the costs in your business.
Q: I had my overhead electrical line taken down and buried because it was too close to my playground for safety. How can I deduct this?
A: Apply your Time-Space Percentage and deduct as a Utilityexpense on Form 8829. If licensing required you to do this, deduct 100% of thecost.
Q: Can I deduct massages, yoga or chiro expenses to keep me healthy?
A: Nope.
Q: Can I deduct tutoring my son?
A: Nope.
Q: Is the cost of tax software deductible?
A: Yes, apply your Time-Space Percentage
Q: Do they still have the Energy Tax Credit for Energy Star Windows and furnace?
A: No. Energy credits still exist for solar panels,solar-powered water heaters, geothermal heat pumps and fuel cells that rely ona renewable resource.
Q: I moved in with my fiancé. He owns the home. Should he claim my portion of the mortgage as rent or can he claim half the business on his taxes?
A: Since you are not married and don’t own the home you can’tdeduct these house expenses: property tax, mortgage interest, house insuranceand house depreciation. If you pay for them, you can deduct utilities, houserepairs and home improvements. If you pay him rent, you can deduct the rent,but he will have to report the rent as income on Schedule E where he can deductsome house expenses.
Q: Can I deduct the installation of a radon gas removal system?
A: Yes, apply your Time-Space Percentage
Q: Is business liability insurance expensive?
A: It depends on your state, how many children you care for, and the amount of coverage you buy. See my insurance directory.
Q: Can I deduct the amount parents owed me when they left as a business expense?
A: No.
Q: Can I deduct lawn care services like True Green Services?
A: Yes, apply your Time-Space Percentage.
Q: How much of tools used to repair and maintain our house can we deduct?
A: Your Time-Space Percentage.
Q: Can I deduct my homeowner’s insurance or just the day care portion?
A: You can deduct your Time-Space Percentage of homeowner’sinsurance and 100% of business liability insurance.
Q: So, we can deduct mortgage interest and property tax using our Time-Space Percentage as a business deduction, and we can deduct the personal portion if we itemize?
A: Correct.
Q: We are having to sue the previous owner of our home for not disclosing water intrusion casing major damage to our home. Can the legal fees be deductible?
A: Yes, apply your Time-Space Percentage.
Record Keeping
Q: Does it matter what expense category I put my receipts in?
A: No.
Q: What if my receipts don’t last three years because of disappearing ink?
A: Either scan them into your computer or make photocopies.
Q: If I write out a note after buying something at a garage sale, will this be accepted as a receipt?
A: It will be accepted as a written record. Take a pictureof the items you buy and you will be fine.
Q: Do I have to report jury duty payments as income?
A: Yes. It’s personal income, not business income.
Q: How long should I save my tax records? What about receipts for items that I have been depreciating?
A: Save your tax records for at least three years afterfiling your taxes. Save receipts for items you are depreciating for as long asyou are depreciating them, plus three years.
Q: What is the simplest way to gather everything together and knowing what to give to my tax preparer? It’s all so overwhelming and I’m worried that I’m going to forget things or not figure something right, such as hours spent doing things when children are not present, meal counts, and so on.
A: You should save receipts for everything! I think it’seasier to get into the habit of saving all receipts rather than trying todecide whether each receipt is deductible or not. Besides saving receipts, keeptrack of all hours you worked, all the miles you drove for your business, and thetotal number of meals and snacks you served. Don’t worry if you missed somethings. You can amend your tax return back three years to catch up if you want.
Q: Do I need to keep parent intake forms, immunization records and physicals of children that are no longer in my care?
A: Some states require providers to keep some of theirchildren’s records for a period of time. Other than whatever you state requiresyou to keep, you can toss these records once the child leaves your program.Save attendance records (for tax purposes) and any records of child injuries(in case there is a lawsuit later).
Q: Where can I see what the new Form 1040 tax form looks like?
A: Here.
Food Expenses
Q: Can I deduct a snack I serve to the child but the child doesn’t eat it?
A: Yes.
Q: Do I need parents to sign a paper to prove that I served extra snacks I wasn’t reimbursed by the Food Program?
A: No. If you are keeping a daily records of un-reimbursed meals/snacks you don’t need a parent signature. However, if you didn’t keep a daily record for last year you can reconstruct these records and get the parents to sign a statement saying their child did eat these extra snacks. Because you can deduct $190 for serving one snack a day to each child, it’s worth reconstructing if you have to.
Q: Why does the Schedule C Worksheet in KidKare not show the cost of meals as a business expense? Is Minute Menu the same as KidKare?
A: KidKare is the new name for Minute Menu. The reason thisdoesn’t appear on the Schedule C Worksheet is because providers could eitheruse the standard meal allowance method or the actual food cost method to claimfood expenses. You should compare which method is a larger deduction for youand add this amount to this Worksheet.
Q: Do I recommend keeping records on the KidKare software program?
A: I do. This is the most comprehensive record keepingsystem for family child care providers.
Q: A nine-month old baby eats lunch with the other children. Can I deduct this meal even though he eats less than the other children?
A: Yes. It doesn’t matter how much or little a child east. Ameal is a meal.
Q: Can I deduct snacks served to my own children during daycare hours?
A: No.
Q: Why can’t I deduct food expenses when I go to a training for my business?
A: You can only deduct food expenses for yourself if you are away from home overnight for business purposes or you have a business meal.
Q: My wife and I go shopping together for the business and we eat out. Is our meal deductible?
A: Probably not. To deduct a meal with your wife, the meal needs to meet the definition of a business meal. See above.
Q: If I stopped to get food on the way to a training because I didn’t have time to make a meal, can I deduct it?
A: No, because it doesn’t qualify as a business meal. Seeabove.
Q: Are meals purchased for employees deductible?
A: If the meals are eaten with the daycare children you can use the standard meal allowance rate, or you can save food receipts and deduct 50% of the actual cost of the food. If the meals are eaten when you take an employee out to a restaurant you can deduct 50% of the cost of the meal.
Tom Copeland - www.tomcopelandblog.com
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