Your Tax Questions Answered - Part II
Here's Part II of questions I answered as part of several webinars for family child care providers. These webinars were sponsored by the Iowa Child Care Resource and Referral and addressed the recent changes in tax laws.
I conduct 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.
Vehicle Expenses
Q: Can I deduct 100% of the cost of the mileage app MileIQ?
A: Yes.
Q: Does MileIQ work just as well as recording miles in KidKare?
A: MileIQ automatically records your business trips, whereas you must enter your trips manually into KidKare.
Q: I bought a new vehicle and put a down payment of $3,000. Can I deduct this?
A: You can only claim the purchase price of your vehicle if you depreciate it using the actual expenses method of claiming car expenses. You can’t directly deduct the $3,000 because it will be included in the depreciation of the purchase price.
Q: I want to buy a van just for my business. Can I deduct 100% of the cost?
A: Only if you keep records showing that you did use the van for business purposes for every mile you drove the van.
Q: If I take the standard mileage rate can I still deduct car loan interest? If so, is this new this year?
A: Yes. This rule has been around for many years.
Q: What if I don’t have any interest on my car loan?
A: That’s good! Then you don’t have this expense to deduct.
Q: Can we deduct the car payment and mileage?
A: No. You can never deduct a portion of the car payment. If you use the standard mileage rate you can deduct the business portion of car loan interest, but not the car payment. If you use the actual expenses method you can deduct the business portion of car loan interest and you can depreciate the business portion of the purchase price of the car.
Q: Parents pay me by check. Can I count the miles to cash the check, the check cashing fee and the fee to load my debit card?
A: Yes, because the primary purpose of this trip is business. The check cashing fee and other fee is directly related to yourbusiness so you can deduct 100% of this cost.
Q: Can I deduct mileage for volunteer activities? What about counting my time doing volunteer work? I volunteer at local youth wrestling programs. I run the concession stand several times a year and travel to these events.
A: You can’t deduct mileage for volunteer activities as abusiness expense but it is deductible as an itemized personal deduction onSchedule A. You can’t count time doing volunteer work.
Q: How do I claim car expenses if I lease?
A: You can use either the standard mileage method or theactual expenses method.
Q: If I drive my car to a business class, can I claim it?
A: Yes.
Q: Can I switch from using the actual car expenses to the standard mileage method?
A: No.
Q: What is the vehicle property tax?
A: Some states charge a tax on the value of the car each time you register your car and get a new sticker on your license plate. You can always deduct the business portion of any vehicle property tax, regardless of which method you use to deduct car expenses. You can only deduct a portion of the registration fee if you use the actual expenses method of claiming car expenses.
Q: I paid a driver to take preschoolers to school. How do I deduct this?
A: Deduct 100% of this as a car expense on Schedule C, line 9.
Q: Will it be a red flag if I’ve never claimed mileage before and start deducting it now?
A: No. Never hesitate to claim what you are entitled to claim if you have the records to back it up. Don’t worry about what you did in previous years.
Q: If I deduct the payment on a car loan, what expense category would it go under?
A: Car and truck expenses. Schedule C, line 9.
Q: Can I deduct in one year 100% of the cost of a vehicle used 100% for my business?
A: Yes, if you have records to show that you used it 100% for your business.
Q: We have two cars and both are used in my business. Can we claim 100% of the costs of one car?
A: Only if you used it 100% for your business.
Tax Preparation
Q: Do you recommend using TurboTax versus hiring a tax professional?
A: I don’t recommend using TurboTax unless you know what you can deduct, know how to determine how much you can deduct, and know what tax forms your expenses will show up on. You want a tax professional who understands the unique tax rules affecting family child care.
Q: Is there specific software you advise us to use as providers?
A: No. TurboTax, H&R Block and TaxAct all have their problems.
Q: Do you have any pointers on how to pick a tax preparer?
A: See my article, "How to Find, Choose and Work with a Tax Preparer."
Q: if the standard deduction changes in future years or the personal exemptions because deductible again do we need to continue to keep records of all of these expenses or just resume keeping those records if there is a change in the future?
A: You don’t need to keep any records if you are choosing the standard deduction over itemizing your deductions. You do need to keep records when you itemize your deductions.
Q: Is there a new Family Child Care Record Keeping Guide for 2018?
A: Yes. The latest edition of this book (9th edition) was written in 2012. However, I updated it in January 2019 to reflect all the current changes in the tax rules.
Q: Where do I put the 20% pass through deduction on my tax form?
A: Form 1040, line 9. See my article, "What is the Qualified Business Income Deduction?"
Q: Can I file as head of household if my son is 18 and working?
A: Yes, if you are providing more than half his support andhe lives with you for at least half the year.
Q: Am I better off filing jointly or separately if I am married with one child?
A: It depends on your personal financial situation. Most providers are better off filing jointly, but you may be better off filing separately.
Q: How far back can I amend my tax return?
A: Three years.
Q: Do I add the two week enrollment deposit parents paid to their tax statement or do I added it in the year of the last day of care?
A: Add it to their tax statement in the year you received the deposit.
Q: Should I give parents a Form W-10 on KidKare at the end of the year?
A: It’s a good idea. Make a copy, have the parents sign the copy and keep one for your records.
Q: If I am receiving Social Security, does this count in calculating our family taxable income when determining the Qualified Business Income Deduction?
A: Yes.
Q: I itemize each year. If I don’t reach the new $24,000 limit in itemized deductions as a married couple, should I use the standard deduction instead?
A: Yes!
Q: Last year my income was high and my expenses were low. I had to pay in over $11,000 in taxes. How can I avoid the high tax?
A: You should focus on how much money you have after you pay taxes, not on how much in taxes you paid. When your income goes up, your taxes go up, but you still have more money after paying the taxes. You could contribute to an IRA and that will reduce your taxable income. Don’t spend more money on items for your business to reduce your taxes. Not spending money is better financially than spending money.
Q: If I file more than three years back can the IRS keep my refund for those years?
A: If you are entitled to get a refund when filing your taxes late, the IRS will charge you a penalty, but then refund you what you are entitled to.
Child Care Tax Credit
Q: Can I child the child care tax credit if my child is 18, lives at home, goes to school full time and receives a W-2 and files their own tax return?
A: Yes, as long as you are providing at least half of theirsupport.
Q: If my child turns 17 in 2019, is he considered under age 17 for 2018?
A: Yes.
Q: What age is a dependent? I have a 22 year old, a 19 year old, and a 16year old living at home.
A: Your child must be under age 19 or under age 24 if theyare a full time student.
Q: How do you know if you are providing more than half of a child’s support who is in college and over the age of 18 and living at home?
A: If the child is not earning any income you are providingmore than half his support. If he is earning income, the value of the food andhousing and other items you buy for your child must be more than what he earns.
Q: If I am single and have children and live with the father, who can claim the child care tax credit for the children?
A: The parent who can claim the child towards this creditmust have the child live with them for more than half the year and provide morethan half the support.
Q: Can I claim the child tax credit if my child turned 16 in 2018?
A: Yes.
Individual Retirement Account (IRA)
Q: How do I start an IRA and where do I go?
A: Sometimes your bank may be able to set up an IRA for you. Otherwise, you can invest directly in a mutual fund.
Q: I contributed $600 to an IRA. Is this deductible?
A: Contributions to any IRA, except a Roth IRA are tax deductible.
Q: Can I contribute to a Traditional IRA, SIMPLE IRA and Roth IRA in the same year?
A: Yes. However, the maximum you can contribute to a Traditional and Roth IRA in one year is $6,000 (plus an extra $1,000 if you are age 50 or older).
Q: Can I claim my husband’s IRA contributions on Form 1040 Schedule 1?
A: Yes.
Q: What is the maximum IRA contribution for someone who is 50 years old in 2019?
A: $7,000 to a Traditional or Roth IRA and $16,000 to aSIMPLE IRA.
Q: What’s the deadline to contribute to an IRA for 2018?
A: April 15, 2019 for a Traditional or Roth IRA. You musthave set up a SIMPLE IRA by October 1, 2018 to make a contribution by April 15,2019 for your 2018 IRA.
Q: Do you have other webinars regarding IRAs and other retirement options?
A: I’m doing a webinar on Reaching Your Retirement Goals on May 15, 2019.
Q: Should we set up an IRA if we are getting ready to retire?
A: It’s likely that you will live at least a fourth of your life in retirement, so it’s never too late to set up an IRA.
Employees
Q: If I hire a neighborhood teenage for summer help, is there a maximum that I can pay before beginning to deduct it on my taxes?
A: If she is working directly with the children, you must treat this person as your employee and pay all the payroll taxes (Social Security/Medicare, state unemployment tax and maybe purchase workers’ compensation insurance). You can deduct any amount you pay the person, plus all the payroll taxes and insurance.
Q: Can I deduct paying my own children to help me in my business?
A: Yes, but you need to follow the rules. See my article on hiring your own children under age 18.
Q: What is the contract labor limit amount?
A: If you hire someone who is an independent contractor(cleaning person, gardener, mowing your lawn, repairing your home, etc.) and pay that person $600 or more, you must file IRS Form 1040Misc. If the person is working directly with children, they are your employee and you must file a series of payroll taxes no matter how little you pay them.
Q: If my husband does a lot of house remodeling and installing flooring would this be better than hiring out this work? If he does the work can I deduct a portion of what it would have cost us if we hired out the work?
A: Having your husband do this work means you aren’t spending money on someone else, so this is better than hiring someone else. Even if you get a tax deduction on some of the money you pay someone else, it won’t reduce your taxes dollar for dollar. Therefore, it’s always better to do work yourself. You can’t deduct as a business expense the amount you would have paid someone to do the work your husband did.
Q: My 19 year old college student lives with me and is also my employee. Would she be considered a dependent?
A: Yes, assuming you provide more than half her support.
Q: How much can I pay my assistant under age 18 without her having to claim it as income?
A: If you assistant is your own child the answer is $12,000.If the assistant is not your own children they have to report even $1 of income. They may not owe any federal income taxes on this money, but they must file a tax return and you must withhold Social Security/Medicare taxes.
Q: I was told there is a minimum amount you can pay an assistant before filing a Form 1040Misc. Is this true?
A: If you pay someone who helps you care for children you donot issue Form 1099Misc because that person is not an independent contractor.
Q: How old does my child have to be to be able to pay them as a helper?
A: Depends on your state law. Federal law allows you to hireyour own children no matter how young, as long as it’s reasonable for them todo the work.
Q: Do I have to do all the payroll tax stuff if I pay my husband?
A: You have to withhold Social Security/Medicare taxes, but not pay federal or state unemployment taxes.
Q: Is the $12,000 standard deduction for 2018 or 2019 when I hire my teen assistant?
A: We know the standard deduction for a single person is$12,000 for 2018. We don’t know yet what it is for 2019.
Q: Do I have to file something for my 14 or 15 year old child who helps me during the summer?
A: You want to create a job description and keep records ofwhen they did the work and when and how much you paid them. You should fileForm W-2 and W-3 at the end of the year (you won’t owe any taxes on these forms)to show that you are treating them properly as an employee.
Q: Can I pay a grandchild to help me in my business?
A: Yes, but if they are helping you care for children youmust treat them as an employee and do all the proper state and federal payrolltaxes.
Q: Do I need to provide a Form 1099 for a co-provider?
A: If you are working together caring for children then you must choose: 1) one of you should be the owner of the business and hire the other person as an employee, not Form 1099; 2) form a partnership and file partnership tax forms, not Form 1099; 3) form a corporation and file corporate tax forms, not Form 1099. The only way you would file a Form 1099 is if one person is not caring for children but is doing work such as cleaning, record keeping, etc.
Employer Identification Number
Q: How do I get a tax identification number? Why should I get one instead of using my Social Security number?
A: You don’t want to give out your Social Security number toanyone because of the risk of identity theft. Get your EIN number from www.irs.gov. Search for “Online EIN.” You’ll fillout a few screens and get your number right away.
Q: I have been doing child care for 20 years. I’ve never had a tax id number and always used my Social Security number. I’m afraid to get one now because I fear it will create a red flag. No one wants an audit!
A: There is no way you would trigger an audit by getting anEIN after all these years. Get one!
Q: Do I need a new EIN if I change my LLC status or drop my LLC?
A: Yes.
Q: Do I need a new EIN if we file as two providers?
A: It depends. If you are the owner and hire the otherprovider you don’t need a new EIN. If you form a partnership or corporation youwill need a new EIN.
Q: Do I need a new EIN if I get married?
A: No.
Health Insurance
Q: If we can find health insurance at a cheaper rate that what my spouse’s employer offers, can we deduct these health insurance premiums?
A: No. To deduct health insurance premiums on Form 1040,Schedule 1, you cannot be eligible to purchase health insurance through anemployer.
Q: If we had to pay Cobra insurance for two months while my spouse did a job switch are those two months of health insurance premiums deductible?
A: No, because you were eligible for Cobra because it was apart of his employer’s health insurance.
Q: Can I deduct private health insurance?
A: It can be claimed as an itemized deduction on Schedule A, but it’s not a business deduction. The only way to make this a business deduction is to set up an HRA.
Incorporation
Q: How do I stop being an LLC?
A: Contact your state secretary of state’s office and fill out the proper forms they give you.
Q: What are the benefits of not being an LLC?
A: You won’t have to pay to be self employed. You won’t haveto pay the annual fees for being an LLC. You won’t have to keep your businessand personal records separate. You won’t have to follow the other formalitiesof being an LLC.
Q: Is the reason to establish an LLC is so that if someone falls you don’t lose personal assets?
A: The primary purpose of establishing an LLC or other corporate status is to reduce your personal liability if someone sues you. As an LLC or corporation a parent can sue your business assets but not your personal assets.
House Depreciation
Q: When depreciating my home do I use its current value or thepurchase price?
A: Use the purchase price, minus the value of the land at the time youbought it, plus any home improvements you made before you went into business.
Q: If I retire in two years and we don’t sell our home for another ten years, will I still have to pay tax on the depreciation I claimed while I was in business?
A: Yes.
Q: If we sell our house and move to another house, do we still get to depreciate the old house?
A: No. Once you stop using your home for your business you aren’tentitled to claim any more depreciation on it.
Q: Can I still depreciate my house if it is paid off?
A: Yes. You depreciate your home based on the purchase priceminus the value of the land when you bought it. It doesn’t matter if you havepaid it off or not, you still get to claim the depreciation.
Q: We’ve owned our home for 25 years and I will be retiring in five years. Would I owe for nine years of depreciation?
A: You will owe taxes on the depreciation you claimed orwere entitled to claim starting in 1997 when the rule changed.
Q: When we do sell our home how much in taxes will we have to pay on the house depreciation?
A: It will depend on what your family’s tax bracket is in the year you sold your home. It will either be 10%, 12%, 22% or 24%.
Other
Q: Is it better to have a business name or use your personal name for your business? How do I notify the state about my business name?
A: Whether you choose to operate under a business name is a personal choice. Some providers use a business name to be more professional, but many just use their own name. If you use a business name you need to register it with your state secretary of state’s office. As part of this process you will do a search to make sure no one else is already using your business name.
Q: What happens if you want to change your business name? Does it confuse the IRS?
A: No big deal. Contact your state secretary of state’s officeto change your name. The IRS doesn’t care.
Q: If my children are taken care of by a babysitter, does the babysitter need to claim the cash payment as income for me to claim a tax deduction?
A: No. If you pay someone to care for your child while youare working, you are entitled to claim the child care tax credit for this expense, regardless of whether the babysitter reports it as income or not.However, you will need the Social Security or EIN number of the babysitter.
Q: A parent left owing me money. I took her to court and won but the parent never paid. What can I do?
A: You can file an appeal at your county courthouse where you originally won your case. Add the cost of the appeal to what the parent owes you.
Tom Copeland - www.tomcopelandblog.com
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