Tax Consequences of Not Being Licensed

What are the Consequences of Not Being Licensed?

By Tom Copeland. Published with permission.

As a family child care provider you fall into one of three categories:

* You meet your state child care regulations

* You are exempt from your state child care regulations

* You are in violation of your state child care regulations

If you are an exempt provider this means you are operating legally under your state's laws. This would be the case if your state had a certification or registration system that was voluntary and you didn't sign up. Or if your state only licenses providers who care for more than four children and you care for three.

If you are exempt the tax consequences are the same as if you were licensed. You can fill out the same tax forms in the same way. You are entitled to the exact same deductions as a licensed provider. The drawbacks: in most states you won't be eligible to participate on the Food Program, and it will be harder to find business liability insurance. Some insurance companies will only offer coverage if you meet your state regulations. In addition, you may not be eligible for grant or loan programs offered through your Child Care Resource and Referral (CCR&R) agency. Lastly, you won't be able to meet higher quality standards and receive financial rewards through your state's Quality Rating and Information System (QRIS), nor will you be eligible for accreditation or other credential programs that signify a quality child care program.

What if you are in violation of your state's child care regulations? In this case you will lose the ability to deduct house expenses (mortgage, rent, property tax, utilities, house insurance, house repairs, and house depreciation). But you can claim all other deductions (food, toys, supplies, car expenses, etc.). You won't be able to get business liability insurance or be on the Food Program. You won't have access to services from your CCR&R (training, grants, loans, referral listing, and more).

I believe every provider should meet their state's child care regulations. Research indicates that providers who do so offer higher quality care than those who don't. If you are licensed I believe every provider should strive to achieve a higher level of quality by participating in their QRIS program or NAFCC Accreditation or a CDA credential.

Photo credit: fbcmlincolnton.com

For more information about starting your business, see my book Family Child Care Business Planning Guide.

Posted by Tom Copeland at 08:48 AM in Record Keeping & Taxes, Starting Your Business |
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Do I Have to Be Licensed to Deduct My House Expenses?

Do I Have to Be Licensed to Deduct My House Expenses?

By Tom Copeland. Published with permission.

Family child care providers are fortunate to be able to deduct many expenses associated with their homes.

These include property tax, mortgage interest, utilities (gas, electric, water, sewer, garbage), house repairs, house insurance, and home depreciation.

These house expenses can total thousands of dollars and represent a signficant business deduction.

Child care providers can deduct the business portion of these expenses (their Time-Space Percentage) on IRS Form 8829 Expenses For Business Use of Your Home.

Can all child care providers claim these house expenses?

The instructions to Form 8829 state that to qualify to claim house expenses, "... you must have applied for (and not have been rejected), been granted (and still have in effect), or be exempt from having a license certification, registration, or approval as a daycare center or as a family or group daycare home under state law."

Suppose your state law says that you can care for unrelated children from one family without needing a license. If you do care for three children from one family, and no other children, you would be exempt from state licensing rules. Therefore, you can claim Form 8829 house expenses.

In this example, if you were caring for unrelated children from two different unrelated families, you would be in violation of state law and therefore would not be entitled to claim house expenses. But, even if you were operating illegally, you could still deduct all other business expenses: food, toys, supplies, car expenses, depreciation on furniture and appliances, etc.

So, the answer to the question posed in the title of this article is "no."

Sometimes tax preparers don't understand the rules for claiming house expenses. A tax preparer from Florida asked me about this today. Sometimes a tax preparer will ask a child care provider, "Are you licensed?" That's not a helpful question. This is because you can be exempt from licensing and still claim the same expenses as a licensed provider.

If you use a tax preparer and are exempt from licensing rules (or have applied for a license but not yet received it), let him or her know that you are still entitled to claim house expenses on Form 8829.

Note: There are some drawbacks if you are not licensed. See my article, "What are the Consequences of Not Being Licensed?"

Image credit: lindaschildcare.net

For more information on claiming deductions, no matter what your status is, see my book, Family Child Care Record Keeping Guide.

Copyright 2011, Tom Copeland, www.tomcopelandblog.com

Should You File Two Schedule C's When Your Husband Works With You?

Should You File Two Schedule C's When Your Husband Works With You?

By Tom Copeland. Published with permission.

Are there situations where a family child care provider would want her husband to pay Social Security taxes under his name on the profit from her business?

Let's say a family child care provider and her husband work side by side caring for children. The child care provider is self-employed (a sole proprietor) and reports all the profit from the business on her business tax return (Schedule C).

The child care provider will pay Social Security taxes on her profit. As a result, she will receive higher Social Security benefits when she retires.

Because the husband is not paying any Social Security taxes on this profit, his Social Security benefits will be lower when he retires.

Is there a way for the husband to earn higher Social Security benefits in this situation?

Yes.

IRS rules allow a married couple in this situation to split the profit, pay Social Security taxes under both their names, and thus spread the future Social Security benefits between the two of them. This can be done without them filing as a partnership.

To do this, the husband and wife should each file a separate Schedule C. They would split the income and expenses on these two forms and each pay Social Security taxes under their own names. This will not increase the total Social Security taxes they will pay.

The two should split the income and expenses according to the amount of work they perform for the business. A husband who works two hours a week doing the record keeping should not claim 50% of the income and expenses.

Warning

The reason to file two Schedule Cs for the one business is to allow the husband to contribute more to his Social Security account, and later earn higher benefits. However, before taking this action I strongly recommend that you find out the long-term impact on the Social Security benefits for both you and your husband.

Social Security rules are complex. You qualify to receive Social Security benefits by working for at least ten years. If your husband also works, you can both receive Social Security benefits. If your husband dies you can receive some of his benefits. Depending on how much you and your husband have earned over the years, it may be more beneficial to have future earnings credited to your husband.

To find out what will be the impact of crediting the profit from your business to you alone or to split it between you and your husband, use the Social Security Retirement Estimator. Talk to someone at your local Social Security office if you are within five years of you or your spouse retiring. They can answer your questions to help you make the best decision.

Other Considerations

You can only file two separate Schedule Cs if you are husband and wife and filing jointly. Unmarried couples or same sex couples cannot do this. You cannot do this if you are a Limited Liability Company (LLC) or a corporation.

If you do this, parents can still pay you and therefore your husband does not need to obtain his own EIN. You don't have to put your husband's name on your child care license or contract. There doesn't have to be any change in how you operate your program.

If you hire employees, either you or your husband can pay the employment taxes. It will not affect the total amount of taxes your family will pay.

I would recommend you keep records (for at least two months each year) to show how many hours in a month each person is working. This will help you defend how you split the income and expenses if you are audited. If you each worked about the same number of hours, each of you would report 50% of the income and 50% of the expenses on their own Schedule C. It doesn't matter who actually paid for the expenses or if all the income was deposited into a checking account under your name only. If you do have a separate business checking account I would recommend putting both names on it.

You can stop filing two separate Schedule Cs in future years if you want to.

Image credit: childcareresearch.org

For more information about claiming income and expenses, see my Family Child Care Record Keeping Guide.

Posted by Tom Copeland at 10:22 AM in Money Management & Retirement, Record Keeping & Taxes | Permalink
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What To Do When You Disagree with Your Tax Preparer

What To Do When You Disagree with Your Tax Preparer

By Tom Copeland Published with permission.

When a family child care provider hires a tax professional to do her taxes, she wants her taxes to be done correctly. She expects that her tax preparer understands the many unique rules affecting her business.

Sometimes, however, you may question how your tax preparer has filled out your tax forms.

What should you do if you disagree with what your tax preparer tells you?

First, say to your tax preparer, "Show me something in writing from the IRS that supports your position."

If the tax preparer can show you that you are wrong, then accept it. But, if he or she can't back up their position with a written authority, you should not let it go.

Ask the tax preparer to contact the IRS directly to seek a written authority. You could also contact the IRS yourself: 1-800-829-4933 .

You can also contact me for help. Or you can ask your tax preparer to contact me (tomcopeland@live.com). I'm happy to point out what the IRS may have said about your question. I've posted everything the IRS has written about family child care in the "IRS Audits/Documents" section shown at the top of my blog.

Here's an example: Let's say you want to deduct the business portion of car loan interest when you are using the standard mileage rate. Your tax preparer says you can't deduct car loan interest unless you use the actual expenses method of claiming car expenses.

You say, "Show me something in writing that supports your position." Your tax preparer won't be able to. Then you say, "I'm not going to accept what you say without a written authority. Please research this issue and contact the IRS if necessary."

In fact, IRS Publication 463 Travel, Entertainment, Gift, and Car Expenses" page 16 says, "However, if you are self-employed and use your car in your business, you can deduct that part of the interest expenses that represents your business use of the car."

Sometimes the answer won't be so clear cut. Your tax preparer may say you can't deduct your front door welcome mat because it's not an "ordinary and necessary" business expense. This language can be found in IRS Code Section 162(a). Ordinary and necessary means typical, helpful, appropriate or useful for your business. Something doesn't have to be indispensible for it to be ordinary and necessary.

There's nothing in writing about welcome mats. You argue that parents and children use your welcome mat to wipe their feet and therefore it's ordinary and necessary. Your tax preparer disagrees and says that it's a personal expense. If you are at an impass, you must make a decision whether to back down or insist that the welcome mat be deducted.

Sometimes you may disagree with your tax preparer because he or she is being too aggressive in claiming business expenses.

I heard this week from a child care provider whose tax preparer told her she could automatically claim that she worked 2 hours per day doing business activities when day care children were not present in her home. There is nothing in writing to support this position.

In fact, it's dangerous to claim any business hours unless you can back them up with some records to show the actual hours you worked. (The best way to show such business hours is to track them carefully for at least two months each year and use the average for these months for the rest of the year.)

If your disagreement with your tax preparer is over a few minor matters, it may not be worth pursuing. But if the disagreement is over a major issue, such as your Time-Space Percentage, then you may want to insist on seeing something in writing before you agree with your tax preparer's position.

If you can't agree on major issues, it may be time to consider changing tax preparers.

No one, including tax preparers, will always have the right answer. We all make mistakes. I make mistakes. However, you should not accept what a tax preparer tells you unless you are comfortable that he or she is giving you the correct information. Asking for something in writing from the IRS to back up a claim is a reasonable request.

Image credit: aksenate.org

For more information about working with tax preparers, see my 2011 Family Child Care Tax Workbook and Organizer.

Posted by Tom Copeland at 10:01 PM in Record Keeping & Taxes | Permalink
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