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THE CHILD CARE NETWORK OF LAKE COUNTY is support group among child care providers in Lake County, Illinois, USA.
Monday, February 18, 2013
Illinois Job Board/Career Development, CHILD CARE JOBS
Friday, February 15, 2013
Grants and taxes
Should I Accept a Grant?
By Tom Copeland. Published with permission.
Unfortunately, when some family child care providers hear that they will have to report the grant as income they are reluctant to apply for it. Here's why this thinking is wrong.
You must report as income on IRS Form Schedule C any grant you receive. This includes cash, training vouchers, or equipment. It's all income whether you buy the toys or equipment yourself or you never see the money and the grant agency has them delivered to your home.
Normally, when your income goes up, your taxes go up. However, when you use the grant to purchase items for your business, you can deduct these as business expenses and will probably wipe out most, if not all of your income. As a result, you may not pay any more in taxes because of the grant.
Examples
Let's look at several examples:
If you used the grant money to buy items that are used 100% for your business, you can deduct 100% of the cost and you won't pay any more in taxes.
$150 worth of small toys used 100% for business = $150 business deduction
$1,000 playground equipment used 100% for business = $1,000 business deduction using the Section 179 rule.
If you use the grant money to buy items that are used by your business and your family, you can deduct the Time-Space % of the cost.
Let's assume your Time-Space % is 40% for these examples.
$150 worth of small toys used by business and family = $150 x 40% = $60 business deduction. You will owe taxes on $90 ($150 grant income - $60 business expense).
$1,000 playground equipment used by business and family = $1,000 x 40% = $400. You can used the 50% bonus depreciation rule to claim a $228 business deduction (see the calculation here). You will owe taxes on $772 ($1,000 grant income - $228 business expense). You will be able to claim the remaining $172 ($400 - $228) in business deductions over the next 6 years.
Taxes
Should you turn down a grant because it might raise your taxes? No!
In the second set of examples above the provider will owe taxes on $90 or $772. If your tax bracket is 30% your additional tax is $30 for the toys or $241 for the plaground equipment. So, you paid $30 in taxes for $150 worth of toys. That's still a deal!
As you depreciate the playground equipment over the next 6 years you will reduce your taxes by $51 ($172 x 30%), so your final tax bill is $190 ($241 - $51). It cost you $190 to get a $1,000 swing set. Still a deal!
Conclusion - don't let the prospect of maybe paying a little more in taxes cause you to not apply for a grant. Grants are a good thing!
Image credit: www.nammfoundation.org
Image credit: www.nammfoundation.org
Telephones' tax
Is My Telephone Tax Deductible?
The answer should be simple for family child care providers. You need a telephone to operate your business and therefore it should be deductible as an "ordinary and necessary" business expense.
Not so fast.
IRS rules clearly state: "The cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even though you have an office in your home is not deductible." (See IRS Publication 535 Business Expenses)
There was a time when the first telephone was tax deductible, but Congress passed a law in 1988 taking away this deduction.
Some child care providers have argued that since child care licensing rules require that they have a telephone, it should be deductible. I once tried to help a child care provider in Minnesota who didn't have a telephone until she was required to get one to become licensed. The IRS told us clearly that she couldn't deduct it.
So, the first phone line into your home, whether it's a land line or a cell phone, is not deductible. You can, however, deduct the business portion of expenses associated with this first phone: business long distance calls, caller id, an answering machine, and the cost of the phone.
Second phone line
If you have a second (or third) phone line into your home, you can deduct the business portion of these lines. The phone lines can be land lines or cell phones.
If you use a second phone line exclusively for your business you can deduct 100% of the cost. If you use it for business and personal purposes, you can use your Time-Space Percentage to determine the business portion. Actually, a more accurate measure of the business use of your second phone line might be your Time Percent.
Note: Under an old law, taxpayers had to track the actual use of their business telephones. But, this requirement was eliminated under the Small Business Jobs Act of 2010.
If your telephone, internet, and cable television bill is bundled together in one bill, how do you break out the cost of your second telephone line?
If your cable company won't break out the cost of the telephone lines, divide the total bill by three. Then divide the third of the bill that represents the telephone lines by the number of phone lines. Then deduct the business portion of the second or third line you use for your business. If your bill tracks the minutes used on each phone line, determine your business use based on the percentage of business minutes used.
As is too often the case with tax laws, what starts out as a simple question has a complicated answer.
Image credit: ibizreviews.com
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