Friday, November 23, 2012

The child and adult care food program

The Child and Adult Care Food Program.

Condensed and summarized by Fernando Olmedo, focalerta@yahoo.es 

Graphic of CACFP apple What federal program helps improve the quality of family child care programs, promotes children's nutrition and pays child care providers about $500 or $1,000 per child per year?
It's the Child and Adult Care Food Program (CACFP).
This federal program is administered by non-profit Food Program sponsors in each state. The sponsor will reimburse you $1.19 for serving breakfast, $2.22 for lunch/supper and $.66 for a snack if you are low-income, serve low-income children, or live in a low-income area. If you don't meet this standard you will receive $.44 for serving breakfast, $1.34 for lunch/supper and $.18 for a snack. Check here for the most current rates.
All licensed child care providers are eligible to participate on the Food Program. In some states you can be exempt from state regulations and participate. Check with a Food Program sponsor in your area for your state's rules.
How to Join the Food Program
There are local Food Program sponsors in every state; in many areas there are competing sponsors. All sponsors must follow the same federal guidelines and pay you the same amount. To find out the names of the sponsors in your area, contact your local Child Care Resource and Referral agency or your state office on nutrition.
I strongly recommend that all child care providers join the Food Program and remain on it as long as they are in business. Being on the Food Program is a sign of professionalism and it shows your concern for the nutritional health of children. It's a benchmark of quality that benefits you and the children in your care.
See also my article: The Three Most Common Objections to the Food Program

Are CACFP Reimbursements Taxable Income?

This question continues to confuse some family child care providers, Food Program (CACFP) sponsors, and tax professionals.

The short answer is Yes.

There is an exception - reimbursements received for a child care provider's own child is not taxable income. IRS Publication 587 Business Use of Your Home says: "Do not include payments or expenses for your own children if they are eligible for the program [Food Program]." The reason is that such reimbursements are considered a "benefit" under Food Program regulations and not subject to taxes, like food stamps.

How should you report Food Program reimbursements on your tax return? Here's where there is the confusion.

IRS Publication 587 says: "Reimbursements you receive from a sponsor under the Child and Adult Care Program of the Department of Agriculture are taxable only to the extent they exceed your expenses for eligible children. If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C. If you food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C."

Therefore, if you follow these instructions and your reimbursements were $4,000 and your food expenses were $5,000 you would should show zero income and $1,000 of food expenses on Schedule C. This is called the "netting" method - you are showing the net income or expense on Schedule C.

However, a newer IRS publication has recommended that child care providers not use the "netting method". The IRS Child Care Provider Audit Technique Guide, revised in 2009, is the publication used by IRS auditors to help them understand the family child care business when they are auditing them. It says: "If the provider receives reimbursement for food costs through the CACFP or any other program, the provider can report all the reimbursements under the income section of Part I of the Schedule C and then deduct the food expenses in full, which is the recommended method."

The Audit Guide goes on: "The netting method is not a preferred method since an [IRS] Examiner will always be looking for the food reimbursement amounts. When you report the amount separately, the Examiner will more easily be able to account for the payments."

Therefore, using the above example the provider should report $4,000 as income and $5,000 as a food expense.

In my many years of experience with IRS audits I have never seen an auditor request that the child care provider use the netting method. Instead, the auditors want to see all the Food Program reimbursements reported as income and all the business food expenses claimed as a deduction.

If you use the netting method you are paying the same taxes as someone who shows all the income and all the expenses. Therefore, you won't be in trouble with the IRS if you do use this method.

If the child care provider in our example was not on the Food Program she would report zero income from reimbursements and claim $5,000 in food expenses. When she does join the Food Program her taxable income will rise by $4,000.

Don't let someone tell you that you shouldn't report your Food Program reimbursements as taxable income. They are probably confused about the netting method. Show them this blog post if you need to convince them.

If you are having problems with your Food Program sponsor about this, I would be happy to contact them.

The Three Most Common Objections to the Food Program


All family child care providers are better off financially if they join and stay on the Child and Adult Care Food Program.

If you serve a breakfast, lunch and one snack a day to children the Food Program will pay you about $500 or $1,000 a year per child. Yet less than half of all eligible child care providers are participating on the Food Program.

Why?

There are three common objections to participation.

1) "If I join the Food Program I'll pay more in taxes."

This is true. However, it's also true that you'll pay more in taxes if you win the lottery, if your husband gets a raise, or if you raise your rates.

The reimbursements you receive from the Food Program are taxable income (See my article on this). Therefore, your taxes will go up. But, what's more important than how much tax you pay is how much money you will have after you pay your taxes. For every $1,000 you get from the Food Program you will keep about $600-$700 after taxes.

2) "I will lose some of my food deductions if I participate on the Food Program."

False. Whether you are on the Food Program or not you will deduct your food expenses in the same way. Let's say you are not on the Food Program and spend $4,000 a year on food for your business. Once you join the Food Program you will still be able to deduct the same $4,000 as a business expense. The only difference is that you now are receiving reimbursements from the Food Program of about $500 or $1,000 per year per child.

3) "The Food Program is not worth it because of all the paperwork."

Look at the Food Program as another job. Are you being paid a reasonable amount for this job? If you served one breakfast, one lunch, and one snack a day to four children and spent three hours a week on Food Program paperwork how much would you be earning per hour? If you received the lower Tier II reimbursement rate you would be earning $13.06 per hour. If you receive the higher Tier I rate you would be earning $27.13 per hour. In addition, much of the paperwork you must do for the Food Program (attendance records, meal counts, etc.) you need to do for tax purposes even if you are not on the program.

Unfortunately, some tax professionals and child care providers are confused about the tax benefits of being on the Food Program. Don't let anyone tell you it's not financially worthwhile to be on the Food Program!

Monday, November 19, 2012

Home improvement

What is a Home Improvement?

By Tom Copeland.  Published with permission

5876557_origFamily child care providers are entitled to deduct expenses that are "ordinary and necessary" for their business. Because you are offering a home-based learning environment for children, it's reasonable to deduct many expenses associated with your house.
This includes expenses associated with cleaning, maintaining and repairing your home. It also includes home improvements.
Home improvements are expenses for the permanent improvement or modification of your home that increase its value or prolongs its useful life.
Examples of home improvements include: attic fan, awnings, carport, central air conditioning, central security alarm system, deck, furnace, garage, new room addition, porch, remodel kitchen/bathroom/playroom/bedroom/living room, replacement windows, and tile/wood flooring.
Home improvements must be depreciated over 39 years. A house repair can be deducted in one year. House repairs include: painting, wallpapering, replacing broken roof shingles, deck staining, floor sanding, furnace cleaning, plumbing/electrical repairs, and replacing broken glass.
Home improvements you made before your business began should be added to the value of the home and depreciated as one. Home improvements you make after your business begins should be depreciated separately.
I recommend that all child care providers depreciate their home improvements. You can use my Family Child Care Inventory-Keeper to help you record these improvements. Although the deduction for home improvements may be small each year, they will add up over time. See my article, "How to Conduct a Household Inventory to Save Money."
Let's look at an example: In 2012 you add a deck to the back of your home that costs $4,000. Since the deck is used by both your family and your business, you must multiply the cost by your Time-Space Percentage. If you Time-Space Percentage is 40%, the business portion of the deck is $1,600 ($4,000 x 40% = $1,600). $1,600 depreciated over 39 years results in a $41 deduction each year for 39 years. If you don't stay in business for the next 39 years (!) you won't get any depreciation after you are closed.
If you made home improvements either before or after you went into business that you have not yet depreciated, it's not too late to claim this depreciation. Use IRS Form 3115 when filing your 2012 tax return. See my article, "How to Claim Previously Unclaimed Depreciation."

www.tomcopelandblog.com

Thursday, November 15, 2012

MOTXILA 21, SEGUNDO VIDEO

http://www.youtube.com/watch?v=1y6WseczA2w
Use este link para ver otro video de la banda MOTXILA 21, compuesta en su mayoría por niños y jóvenes con sindrome de Down.
Si le gustó, busque el otro que tenemos.

Tuesday, November 6, 2012

Do you qualify to receive social security benefits?

Do You Qualify to Receive Social Security Benefits?

By Tom Copeland. Published with permission.

Social-security-1[1]Family child care providers work very long hours each year and look forward to the day when they can receive Social Security benefits.
But, before you can receive these benefits you must first qualify to receive them.
You must work and pay Social Security taxes for at least ten years before you will quality to receive Social Security benefits.
You don't have to work these years consecutively and they can be a combination of years working as a family child care provider and as an employee for another business.
To pay Social Security taxes you must earn a profit of at least $400 in a year. If you have a business loss or a profit of less than $400, you won't owe Social Security taxes for that year and the year won't count towards the ten-year goal.
In a survey I did for my book Family Child Care Money Management and Retirement Guide 16% of family child care providers did not have a profit large enough to qualify for the work they did in the previous year.
To see if you have qualified to receive Social Security benefits, go to the Social Security website and look up your record of earnings or call 800-772-1213 . If you are age 60 or older you should be receiving an annual statement that will tell you if you do qualify.
If you do earn more than $400 profit, you should be filing IRS Form Schedule SE Self Employment Tax with your annual tax return. This form will calculate the amount you owe in Social Security taxes. The amount is then transferred onto your IRS Form 1040 and added to the federal income taxes you owe. You do not write a separate check to the Social Security office. Check your own past tax records to see that you properly filed IRS Form Schedule SE.
If your profit is slightly below $400 and you have not yet qualified to receive Social Security benefits, it is a good idea to reduce some expenses to show a higher profit and qualify for that year.
It may seem strange to hear me say not to claim a business deduction! Claiming all allowable business deductions is a message I've been preaching for many years. However, making sure you qualify to receive Social Security benefits is one exception to this rule.
Image credit: money.howstuffworks.com
6a0133f3fc5805970b015435fd4328970c-pi[1]For more information about Social Security, see my book Family Child Care Money Management and Retirement Guide.

Thursday, November 1, 2012

Family Child Care Provider Successfully Claims Exclusive Use Room in IRS Audit

Family Child Care Provider Successfully Claims Exclusive Use Room in IRS Audit

By Tom Copeland. Published with permission.

100_2875When family child care provider Bethany Marcoe from Sioux City, Iowa was notified she was being audited, she thought she had done nothing wrong and had nothing to hide.
"I went into my audit with great confidence and came out crushed," she wrote me. The auditor told her she owed about $2,800 in taxes.
Bethany had claimed that she used her toddler room and basement exlcusively for her business on her 2009-2011 tax return. I first wrote about Bethany's case in my article "How to Defend Your Exclusive Use Room." For a discussion of the exclusive use rule, see my article "How to Claim the Exclusive Use Rule."
Family child care providers are the only business that can claim rooms in their home that are used exclusively for their business, as well as rooms that are used regularly.
This uniqueness can create problems when child care providers are audited by the IRS and the auditor does not understand these rules. This is what happened to Bethany.
The auditor said she could never claim an exclusive use room for two reasons. One: once a day care child leaves a room it is no longer used for business purposes. Two: there is no way to prove that the child care provider's family does not use these rooms when day care children are not present. In addition, the auditor claimed that Bethany must report as income reimbursements she received from the Food Program for her own child. See my article on this last point.
I wrote a letter to the auditor on Bethany's behalf and refuted the auditor's statements.
At one point the IRS auditor told Bethany that she couldn't claim exclusive use rooms because of what was written in IRS Publication 587 Business Use of Your Home. There is nothing in that publication that says what the auditor thought it said.
It took my letter and Bethany's insistance before the auditor finally read the instructions to IRS Form 8829 Expenses for Business Use of Your Home. There it explains how to calculate the Time-Space Percentage when there are exclusive use and regular use rooms in the same home.
At last the auditor agreed with Bethany. As a result, her tax bill dropped from $2,800 to $1,105.
Bethany had inadvertently claimed all of her basement as exclusive use space, even though she had a laundry room and bathroom in the basement that were used by her family. Her initial Time-Space Percentage was 74%. The auditor originally would only allow 48%, but in the end accepted a revised 59% based on an exclusive use playroom and part of the basement.
Note: some family child care providers and tax preparers are reluctant to claim a Time-Space Percentage higher that around 40% because of the fear that the IRS won't accept a higher percentage. This case is one of many examples where a provider has succesfully claimed a higher percentage.
Bethany wrote me a letter of thanks, saying, "I don't think I could thank Tom enough for giving me the necessary information and encouragement to fight the IRS. Armed with this information from Tom I was able to show the IRS... I was still in the right... and I won."
If you are being audited about your exclusive use room you may want to use the arguments in my letter to defend yourself. Before you do, please contact me to get the latest information on this tax issue.
I continue to help child care providers who are being audited by the IRS through my work with the National Association for Family Child Care. If you need help, please contact me at tomcopeland@live.com or 651-280-5991 begin_of_the_skype_highlighting FREE 651-280-5991 end_of_the_skype_highlighting .
Image credit: Bethany's exclusive use toddler room
Record Keeping Guide smallFor more information on how to calculate your Time-Space Percentage when you have exclusive and regular use rooms, see my book Family Child Care Record Keeping Guide.
www.tomcopelandblog.com