Food Expenses
Condensed and summarized by Fernando Olmedo, focalerta@yahoo.es
How to Keep Records of Your Food Expenses
Keeping good records of your food expenses seems simple enough if you are a family child care provider who uses the standard meal allowance rate.
But many child care providers fail to keep the records they should. As a result these providers lose hundreds of dollars of business deductions when audited by the IRS. I've seen it happen over and over again.
The IRS standard meal allowance rate allows you to claim your food expenses without having to keep any food receipts! Instead, you must keep the following records: the name of each eligible child, dates and hours of attendance in the family day care, and the type and quantity of meals and snacks served.
If you are on the Food Program your monthly claim form contains all of this information. If you are not on the Food Program you can track this information by using a sample log provided by the IRS or use a similar log found in the annual Redleaf Calendar-Keeper (which is also available for free online).
The Problem
The problem is that most child care providers serve meals and snacks that are not reported on their Food Program monthly claim form. This includes meals and snacks served that are beyond the three servings a day that can be reimbursed by the Food Program. It can also include meals and snacks that were disallowed by the Food Program.
Meals and snacks served to children that are not reimbursed by the Food Program do not have to be nutritious. See my article,"What is a Popsicle Worth to You?"
Unfortunately, many child care providers assume that they can claim these "extra" meals and snacks without keeping any records. I hear providers tell me, "It's in my contract that I serve an afternoon snack," or "I always serve an afternoon snack." This is not enough. In an audit the IRS can say, "Since you didn't keep a record during the year, I'm going to deny this afternoon snack."
Losing this deduction can be a big deal. One snack a day served to one child for a year represents a $179 deduction on your 2012 tax return. In 2013 it will be $185.
The IRS rule requires you to keep a daily record of all meals and snacks served. This can be as simple as recording "Sally, Monday afternoon snack," or putting a checkmark next to a symbol for a snack each day.
How to Catch Up
If you don't have a daily record showing all the unreimbursed meals and snacks you served so far this year, what do you do?
Let's say you always serve an afternoon snack. Put each child's name on a piece of paper and use your attendance records to record how many days the child was in your program from the beginning of the year until now. Show your results by month ("January - 22 snacks, February - 20 snacks," etc.). Ask the parents of each child to sign the bottom of the paper where you have written, "This represents the number of snacks your child was served in my program from January 1st to _____." If you occasionally served a dinner or took children to a fast food place for lunch, add this to the paper. The parents will know that their child ate these meals and snacks and should be happy to sign it.
From this day forward, keep a daily record of the "extra" meals and snacks served to the day care children. It's okay to go back and reconstruct these records for part of a year, but don't make this a habit. Record these meals and snacks each day going forward. Some Food Program sponsors will allow you to record your "extra" servings on your monthly claim form. Ask them if this is okay before you do so.
The Big Three
The tracking of these meals and snacks is one of the top three things you can do to reduce your taxes. The other two are: keep track of all the hours you work in your home (particularly when children are not present) and save receipts for all expenses associated with your home.
“If I use the standard meal allowance rate, can I also deduct the actual cost of baby food and formula?”
- No. You must either use the standard meal allowance rate or the actual cost of food method for all food served in your home. You can include formula and baby food served to a baby in your meal counts. If the parent brings all the food for a baby’s meal, you cannot deduct that meal.
“How should food be deducted?”
- Yes! Count all such meals and snacks as well as any additional meals and snacks you serve that are not reimbursed by the Food Program.
“If I use the standard meal allowance rule can I also deduct food for a party at my home for my daycare parents?”
- Yes. Deduct this as an activity expense or as advertising.
“Can I count the actual food costs for going out to lunch or should I include it in my meal count when using the standard meal allowance rate?”
- If the lunch is for the children in your care, count it as part of the standard meal allowance rate. If the lunch is for you, you can only deduct this if it’s a “business lunch.” To deduct a business lunch save the receipt, make a note of who you ate lunch with and what business topics you discussed.
“Where do I put food expenses on my tax forms?”
- IRS Form Schedule C, line 28. Enter “food” on one of the blank lines on the back of the form.
Estimating Food Expenses Can Be Risky
Is it reasonable to claim 40% or 58% of your total food expenses as a business deduction?
One provider did so and now is faced with defending this in an IRS audit.
And it is not easy to defend.
Most family child care providers use the standard meal allowance rule to claim their food expenses. They find it simpler to calculate and it almost always generates a higher deduction than using the actual expenses method to claim food expenses.
There are some child care providers who will be better off using the actual expenses method: those who buy more expensive, harder to find foods and those who live in areas with high food prices.
The most accurate way is to estimate your own average cost per breakfast, lunch and snack by pricing out 3-5 different servings and then multiplying your averages by the number of meals and snacks you served.
The tax preparer of the child care provider being audited used a different method. He took her total food receipts and multiplied it by 40% for one year and 58% for another year.
Calculating your business food expenses based on a percentage of your total food receipts can be an acceptable way to do this, but only if it's done carefully. The best way would be to identify the number of meals and snacks each person ate, including every member of your family and the day care children.
Then you would need to estimate whether each person ate an equal amount and whether the meals and snacks cost the same or not. In other words, do you and your husband eat more than your own children or the day care children? Does the cost of breakfast served to the day care children equal the cost of a breakfast eaten by your family on weekends? You would probably have to assign a higher cost to meals eaten by adults and a lower cost to snacks.
As you can can, this type of calculation is not an easy one to make. Without careful tracking of meals and food costs, it cannot be done accurately.
In the case of the child care provider who claimed 40% and 58% of her food costs, she doesn't know how her tax preparer came up with these percentages. Even though she saved all her food receipts, it will be a difficult job to defend these percentages. In the end, she may have to use the standard meal allowance rate, accept a lower food deduction and pay more in taxes.
The Moral
Don't let your tax preparer put any number on your tax return if you don't understand how it was arrived at. It can cost you later in an audit.
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.
Reimbursements you receive from the Food Program are taxable income. (The only exception to this rule is any reimbursements you receive for your own children are not taxable.)
Reimbursements you receive from the Food Program are taxable income. (The only exception to this rule is any reimbursements you receive for your own children are not taxable.)
You don’t lose your ability to claim the same amount in food expenses just because you join the Food Program!
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."
Think of the Food Program as a job that’s paying you to do some paperwork. How much are you being paid per hour for doing the paperwork required by the Food Program? If you spend three hours per week on paperwork (and most providers can do this), that’s 156 hours a year. If you care for four children, serve one breakfast, lunch and one snack each day, and receive the lower Tier II rate (as of July 2014), you would earn $2,256 ($564 per child x 4). Therefore, your hourly wage would be $14.46 ($2,256 divided by 156 hours). If you spent $5,000 on food, the $2,256 wouldn’t cover this, but why would you turn down $2,256 to help you pay for some of this cost? If you received the higher Tier I reimbursement rate, you would be earning $30.05 per hour ($1,172 per child x 4 divided by 156 hours = $30.05). Not bad regardless of which reimbursement rate you receive! 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!
Reporting Food Program Reimbursements and Claiming Food Expenses
· • Reimbursements received from the Food
· Program for children in your care are taxable income.
• Reimbursements received from the Food Program for your own children are not taxable income.
• You are always better off financially by being on the Food Program.
Claiming Food Expenses
- You have two choices in how to claim your food expenses:
- Standard Meal Allowance Method (IRS Revenue Ruling 2003-22)
- If you use this method, you do not have to save any food receipts, business or personal!
- Add up all the breakfasts, lunches, suppers, and snacks you serve to the children in your care.
- Multiply the total by the following standard meal allowance rate:
- 2011 - $1.19 breakfast, $2.22 lunch/supper, $0.66 snack
- You can claim a maximum of one breakfast, one lunch, one supper, and three snacks per day, per child.
- All providers can use these rates whether or not they are on the Food Program and whether or not they are a Tier I or a Tier II provider.
- Providers must keep the following records: name of each child, dates and hours of attendance in care, and the number of breakfasts, lunches, suppers, and snacks served. Be sure to save food receipts that contain non-food items such as paper products.
• Actual Food Cost Method
- There is no one way to estimate your actual food costs. You can buy food separately, calculate your own average cost per meal, per child or use other methods.
- You can deduct the cost of all the food you serve to the children in your care, whether or not it was reimbursed by the Food Program. You cannot deduct the cost of any food served to your own children.
- The simplest and most accurate method of estimating actual food costs for most providers is to calculate an average cost per meal per child and multiply this by the number of meals and snacks you served. Your average cost per meal may be greater than the standard meal allowance rate.
- Providers must keep the following records: all business and personal food receipts, menus, name of each child, dates of attendance, and the number of breakfasts, lunches, suppers, and snacks served.
