Family Child Care Provider Saves $840 in IRS Audit
By Tom Copeland. Posted with his permission.
"I think every daycare provider's worst nightmare is being audited by the IRS," a family child care provider from Woodbury, Minnesota wrote to me recently.
When she received her IRS audit notice last July she had just been through a rough few years. Both of her parents died and she had to move out of her foreclosed home right before last Christmas.
"Needless to say, my daycare records were not kept to the best of my ability," she said.
Her auditor would not count the hours she worked on business activities in her home when daycare children were not present. He also disallowed hundreds of dollars she spent on presents for the daycare children and denied her deductions for the water, sewer and gas/electric house expenses.
After she contacted me for assistance, I helped her draft a letter to the auditor which successfully led to him changing his mind and reducing her tax burden by $840!
Time-Space Percentage
Like most child care providers, she did not keep good records of the number of hours she worked in her home on business activities when children were not present. On her tax return she had estimated that she worked 55 minutes in the morning before children arrived (preparing breakfast and cleaning up) and 90 minutes in the evening after the children left.
I asked her to keep a daily record and, after a week, she presented this to the auditor. Her records showed that her typical evening work included: "Pickup toys, sanitize bottles/toys, vacuum clean entire house, sweep and mop kitchen floor, empty and fill dishwasher, laundry, bookeeping, preparation of preschool crafts - grathering supplies (glue, construction paper, sequins, scissors), clean bathrooms (toilets and floors)."
The auditor was originally only going to allow her to count an extra half hour a day, but changed his mind after looking at her reconstructed records.
My advice has always been for child care providers to track these hours for at least two months each year. I add below an article I wrote about this after I first talked with her. I cannot emphasize how important it is to follow my advice and track these hours for two months each year. In this case, we won without such records, but there is no guarantee that you will. Typically child care providers underestimated these hours.
Gifts
She had claimed $1,790 in gifts to the children over two years. The auditor applied a "gift" rule that says you can only claim up to $25 per person, per year as a business deduction. I pointed out that the IRS Child Care Audit Technique Guide makes a distinction between gifts and children’s activities: “Examiners should not confuse expenses related to activities done with the children with gifts.”
I had her explain to the auditor that the children opened their present and played with the items with the other children in her program.
If you identify expenses as "gifts" on your tax return, expect the IRS to try to apply this $25 rule. Instead, list them as activitiy expenses if they are items that are shared with the other children in care. I add below un article about this subject.
Utilities
For reasons we don't know, the auditor originally disallowed her expenses for water, sewer, and her monthly energy bill from Xcel Energy. When we pointed out that she was allowed the time-space percentage of these expenses on IRS Form 8829, the auditor agreed.
After the audit was over, she wrote me, "I was very pleased and I know I couldn't have done it without Tom's help."
Free Audit Help
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 . Join NAFCC and you can receive free audit assistance!
Image credit: wealthlawblog.com
For more information about how to keep accurate records and improve the chances that you will not owe any money if you are audit, see my Family Child Care Record Keeping Guide.
When she received her IRS audit notice last July she had just been through a rough few years. Both of her parents died and she had to move out of her foreclosed home right before last Christmas.
"Needless to say, my daycare records were not kept to the best of my ability," she said.
Her auditor would not count the hours she worked on business activities in her home when daycare children were not present. He also disallowed hundreds of dollars she spent on presents for the daycare children and denied her deductions for the water, sewer and gas/electric house expenses.
After she contacted me for assistance, I helped her draft a letter to the auditor which successfully led to him changing his mind and reducing her tax burden by $840!
Time-Space Percentage
Like most child care providers, she did not keep good records of the number of hours she worked in her home on business activities when children were not present. On her tax return she had estimated that she worked 55 minutes in the morning before children arrived (preparing breakfast and cleaning up) and 90 minutes in the evening after the children left.
I asked her to keep a daily record and, after a week, she presented this to the auditor. Her records showed that her typical evening work included: "Pickup toys, sanitize bottles/toys, vacuum clean entire house, sweep and mop kitchen floor, empty and fill dishwasher, laundry, bookeeping, preparation of preschool crafts - grathering supplies (glue, construction paper, sequins, scissors), clean bathrooms (toilets and floors)."
The auditor was originally only going to allow her to count an extra half hour a day, but changed his mind after looking at her reconstructed records.
My advice has always been for child care providers to track these hours for at least two months each year. I add below an article I wrote about this after I first talked with her. I cannot emphasize how important it is to follow my advice and track these hours for two months each year. In this case, we won without such records, but there is no guarantee that you will. Typically child care providers underestimated these hours.
Gifts
She had claimed $1,790 in gifts to the children over two years. The auditor applied a "gift" rule that says you can only claim up to $25 per person, per year as a business deduction. I pointed out that the IRS Child Care Audit Technique Guide makes a distinction between gifts and children’s activities: “Examiners should not confuse expenses related to activities done with the children with gifts.”
I had her explain to the auditor that the children opened their present and played with the items with the other children in her program.
If you identify expenses as "gifts" on your tax return, expect the IRS to try to apply this $25 rule. Instead, list them as activitiy expenses if they are items that are shared with the other children in care. I add below un article about this subject.
Utilities
For reasons we don't know, the auditor originally disallowed her expenses for water, sewer, and her monthly energy bill from Xcel Energy. When we pointed out that she was allowed the time-space percentage of these expenses on IRS Form 8829, the auditor agreed.
After the audit was over, she wrote me, "I was very pleased and I know I couldn't have done it without Tom's help."
Free Audit Help
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 . Join NAFCC and you can receive free audit assistance!
Image credit: wealthlawblog.com
Gifts ans tax.
By Tom Copeland. Published with permission.
Many family child care providers serve families who are struggling financially. Some providers want to help these families, giving them extra gifts for the entire family to enjoy. Such caring and generosity is admirable.
What are the tax consequences of giving gifts to children and their parents?
Now you may think that I'm being Scrooge-like to discuss taxes when talking about gifts, but that's what this blog is about!
IRS rules say that you can deduct gifts as a business expense up to $25 per person per year. This means that if you give $25 worth of gifts (birthday cards, Christmas presents, Mother's Day gifts, etc.) to a child's mother and another $25 to the child's father you can deduct the full $50. If you give gifts worth $15 to the mother and $45 to the father, you can deduct $40 ($15 plus $25).
The same $25 per person limit applies to gifts you give to the children in your care. However, the IRS Child Care Audit Guide says, "[IRS] Examiners should not confuse expenses related to activities done with the children with gifts."
Let's say you give a toy as a Christmas present to a child. If the toy is wrapped and the child takes it home to open it, then it's a "gift" subject to the $25 limit. If the child opens the present at your home and plays with the toy with the other children, then this could be said to be an activity expense not subject to the $25 limit. The difference between a gift and an activity expense may be a fine line. Certainly all the expenses associated with a Christmas party in your home for the children in your care are 100% deductible. Such expenses may include: party decorations, food, games, balloons, party favors, Christmas cookies and treats, etc.
You cannot claim a personal charitable contribution on any of the gifts you give to the families in your care. This is because families are not a charitable organization. Examples of non-profit charitable organizations are churches, Salvation Army, Goodwill, colleges, etc. You can claim a charitiable contribution to such organizations on your IRS personal itemized tax form.
The holiday season is a time of giving, but don't let the tax consequences determine what you do. Gifts should be seen as gifts, not tax deductions.
Image credit: clipart-for-free.blogspot.com
Tom Copeland, www.tomcopelandblog.com
What Hours Can You Count?
Many family child care providers serve families who are struggling financially. Some providers want to help these families, giving them extra gifts for the entire family to enjoy. Such caring and generosity is admirable.
What are the tax consequences of giving gifts to children and their parents?
What are the tax consequences of giving gifts to children and their parents?
Now you may think that I'm being Scrooge-like to discuss taxes when talking about gifts, but that's what this blog is about!
IRS rules say that you can deduct gifts as a business expense up to $25 per person per year. This means that if you give $25 worth of gifts (birthday cards, Christmas presents, Mother's Day gifts, etc.) to a child's mother and another $25 to the child's father you can deduct the full $50. If you give gifts worth $15 to the mother and $45 to the father, you can deduct $40 ($15 plus $25).
The same $25 per person limit applies to gifts you give to the children in your care. However, the IRS Child Care Audit Guide says, "[IRS] Examiners should not confuse expenses related to activities done with the children with gifts."
Let's say you give a toy as a Christmas present to a child. If the toy is wrapped and the child takes it home to open it, then it's a "gift" subject to the $25 limit. If the child opens the present at your home and plays with the toy with the other children, then this could be said to be an activity expense not subject to the $25 limit. The difference between a gift and an activity expense may be a fine line. Certainly all the expenses associated with a Christmas party in your home for the children in your care are 100% deductible. Such expenses may include: party decorations, food, games, balloons, party favors, Christmas cookies and treats, etc.
You cannot claim a personal charitable contribution on any of the gifts you give to the families in your care. This is because families are not a charitable organization. Examples of non-profit charitable organizations are churches, Salvation Army, Goodwill, colleges, etc. You can claim a charitiable contribution to such organizations on your IRS personal itemized tax form.
The holiday season is a time of giving, but don't let the tax consequences determine what you do. Gifts should be seen as gifts, not tax deductions.
You cannot claim a personal charitable contribution on any of the gifts you give to the families in your care. This is because families are not a charitable organization. Examples of non-profit charitable organizations are churches, Salvation Army, Goodwill, colleges, etc. You can claim a charitiable contribution to such organizations on your IRS personal itemized tax form.
The holiday season is a time of giving, but don't let the tax consequences determine what you do. Gifts should be seen as gifts, not tax deductions.
Image credit: clipart-for-free.blogspot.com
Tom Copeland, www.tomcopelandblog.com
By Tom Copeland. Posted with his permission.
It's simple. Keep track of all the hours you work in your home on family child care business activities when no day care children are present.
Do this for at least two months each year.
Unfortunately, many family child care providers don't keep such records.
I was reminded of this while talking today with a Minnesota family child care provider who is being audited by the IRS. She cared for children from 6:00am to 5:30pm Monday through Friday. Her auditor was going to allow her to claim twelve hours a day when calculating her Time-Space Percentage.
Your Time-Space Percentage is based on the hours you work in your home (hours children are present plus hours you work in your home doing business activities after the children are gone) and the number of rooms you use on a regularly basis for your business.
I asked her if she worked more than an extra half hour a day on other business activities after the children were gone. She said "yes," but she had kept no records of these hours of work. Her failure to keep these records could cost her hundreds of dollars in her audit.
Most of the child care providers I help with their IRS audit are in a similar position. They have attendance records and Food Program records to show when day care children are in their care, but they have no records to show their work activities after the children are gone.
Why This is Important
Keeping these records is important! You can count hours spent cleaning, activity preparation, meal preparation, time spent on the Internet, parent interviews, talking to parents on the phone, and so on. See my article for a comprehensive list of activities you can count.
Every hour a week spent on these activities will increase your Time Percent by 1%. This may not seem significant, but it is.
You will be applying your Time-Space Percentage to all expenses used for both your business and your family. This includes property tax, mortgage interest, utilities, house insurance, house repairs, house depreciation, toys, supplies, furniture, appliances, and so on. This could easily total more than $20,000. One percent of $20,000 is $200. This means your business deductions would increase by $200 for every hour a week you spend on these activities.
The average number of hours that family child care providers work after children are gone is 13.9 hours a week*. That is equal to 8.3% of the hours in a week (168 hours). If you spent 13.9 hours each week on these activities and had $20,000 of shared expenses, you could deduct an additional $1,660 in business deductions ($20,000 x 8.3% = $1,660).
What Should You Do Now?
Start keeping track of these hours for two months before the end of the year. Use your average number of hours for the other ten months of the year. Keep doing this every year.
I told the provider over the phone to start tracking these hours as of today for the next two months. I also told her to reconstruct what hours she worked in 2010 and 2011 (the years she was being audited): "Write down in great detail what you do each morning to get ready to greet the children (preparing breakfast, laundry, sweeping floors, etc.). Do the same thing for after the children leave, in the evenings and on weekends."
Then she can argue to her auditor, "Here's what I did to reconstruct my hours for 2010 and 2011. I've also been tracking it for the past few weeks in 2012 and the hours I'm working each week now on these activities are consistent."
Because most providers who I assist with their audits didn't keep careful records, we are forced to do this reconstruction and make this argument. In other audit cases I have handled, we usually win some of these hours, but usually not all of them. This means these providers are not getting to claim all of the hours they worked. As a result, they paid more in taxes than they should have.
Don't underreport your hours on your tax return. Two months of careful recording keeping each year will make a big difference.
And I'm not exagerating when I say that doing so is the single most important thing you can do to reduce your taxes!
At the daycare.com family child care forum providers recently compiled a list of business activities conducted after children were gone:
Making out a grocery list
Unloading groceries
Cooking, preparing meals
Cleaning up just before children arrive and after children leave
Laundry (washing, drying, folding, putting away)
Loading dishwasher (emptying dishwasher)
Online research, webinars, visiting child care forums, and this blog!)
Cleaning toys, rotating toys, putting away and organizing toys
Record keeping, entering data into Minute Menu software, working on taxes
Baby/child proofing home
Parent interviews
Office work, filing, writing emails to parents, photo copying, writing newsletters, creating and updating your website/blog
Cleaning finger prints off sliding glass doors/windows
Writing contracts and policies
Talking to parents on the phone
Building a business website
Communicating with parents via Facebook
Placing ads on Craigslist and other online classified ad websites
Food Program paperwork
Conducting activities for local family child care association in home
Reading magazines to find recipes
Reading books by Tom Copeland, or reading Tom's blog(!)
Collecting items around the home for craft projects
Planning and preparing children's activities (lesson plans, home decorations)
Decorating playroom for themes and special days
Putting together a daycare scrapbook or photo album
This is not a complete list. You can count hours spent on activities that you would not be doing except for the fact that you are running a business. So, you can count hours spent on putting together a photo album for parents and the children in your care because you would not do this if you weren't in business.
You cannot count hours spent on general house keeping activities: cleaning out the garage, painting a deck, cleaning out gutters, washing the car, mowing the lawn, remodeling, making house repairs, cleaning a pool, defrosting the freezer, cleaning the oven, cleaning windows, etc.
We don't want to get too aggressive in counting hours on activities that would have done anyway.
When you clean areas that are used for both business and personal purposes you can count the business portion of the time, but not all the time. If it takes you 2 hours to clean the kitchen, bathrooms, and living room on Saturday, don't count all of this as business cleaning time. Instead, estimate the time that it took you to clean these areas because of your business - maybe 1 hour. Don't worry about being precise; the important point is not to count the entire 2 hours.
If you have a separate business freezer you could count the time to clean it. If you have a separate play room you could count all the time to clean it.
It's not necessary to carefully track these hours every day of the year. Instead, track these hours for two months each year and use the average from these two months for the rest of the year. In fact, if you didn't keep good records for 2010, it's not too late to track these hours for the next month or so and use the average hours per week for 2010. Then track two more months in 2011 and each year afterwards.
Enter all the hours you worked in your home on IRS Form 8829 Expenses for Business Use of Your Home, line 4.
Tracking the hours you work in your home after the children are gone is probably the single most important record keeping task you can perform that will reduce your taxes the most!
What other business activities do you perform after children are gone?
Image credit: mcnairclean.com
For more information, see my book Family Child Care Record Keeping Guide.
Tom Copeland, www.tomcopelandblog.com
It's simple. Keep track of all the hours you work in your home on family child care business activities when no day care children are present.
Do this for at least two months each year.
Unfortunately, many family child care providers don't keep such records.
I was reminded of this while talking today with a Minnesota family child care provider who is being audited by the IRS. She cared for children from 6:00am to 5:30pm Monday through Friday. Her auditor was going to allow her to claim twelve hours a day when calculating her Time-Space Percentage.
Your Time-Space Percentage is based on the hours you work in your home (hours children are present plus hours you work in your home doing business activities after the children are gone) and the number of rooms you use on a regularly basis for your business.
I asked her if she worked more than an extra half hour a day on other business activities after the children were gone. She said "yes," but she had kept no records of these hours of work. Her failure to keep these records could cost her hundreds of dollars in her audit.
Most of the child care providers I help with their IRS audit are in a similar position. They have attendance records and Food Program records to show when day care children are in their care, but they have no records to show their work activities after the children are gone.
Why This is Important
Keeping these records is important! You can count hours spent cleaning, activity preparation, meal preparation, time spent on the Internet, parent interviews, talking to parents on the phone, and so on. See my article for a comprehensive list of activities you can count.
Every hour a week spent on these activities will increase your Time Percent by 1%. This may not seem significant, but it is.
You will be applying your Time-Space Percentage to all expenses used for both your business and your family. This includes property tax, mortgage interest, utilities, house insurance, house repairs, house depreciation, toys, supplies, furniture, appliances, and so on. This could easily total more than $20,000. One percent of $20,000 is $200. This means your business deductions would increase by $200 for every hour a week you spend on these activities.
The average number of hours that family child care providers work after children are gone is 13.9 hours a week*. That is equal to 8.3% of the hours in a week (168 hours). If you spent 13.9 hours each week on these activities and had $20,000 of shared expenses, you could deduct an additional $1,660 in business deductions ($20,000 x 8.3% = $1,660).
What Should You Do Now?
Start keeping track of these hours for two months before the end of the year. Use your average number of hours for the other ten months of the year. Keep doing this every year.
I told the provider over the phone to start tracking these hours as of today for the next two months. I also told her to reconstruct what hours she worked in 2010 and 2011 (the years she was being audited): "Write down in great detail what you do each morning to get ready to greet the children (preparing breakfast, laundry, sweeping floors, etc.). Do the same thing for after the children leave, in the evenings and on weekends."
Then she can argue to her auditor, "Here's what I did to reconstruct my hours for 2010 and 2011. I've also been tracking it for the past few weeks in 2012 and the hours I'm working each week now on these activities are consistent."
Because most providers who I assist with their audits didn't keep careful records, we are forced to do this reconstruction and make this argument. In other audit cases I have handled, we usually win some of these hours, but usually not all of them. This means these providers are not getting to claim all of the hours they worked. As a result, they paid more in taxes than they should have.
Don't underreport your hours on your tax return. Two months of careful recording keeping each year will make a big difference.
And I'm not exagerating when I say that doing so is the single most important thing you can do to reduce your taxes!
At the daycare.com family child care forum providers recently compiled a list of business activities conducted after children were gone:
Making out a grocery list
Unloading groceries
Cooking, preparing meals
Cleaning up just before children arrive and after children leave
Laundry (washing, drying, folding, putting away)
Loading dishwasher (emptying dishwasher)
Online research, webinars, visiting child care forums, and this blog!)
Cleaning toys, rotating toys, putting away and organizing toys
Record keeping, entering data into Minute Menu software, working on taxes
Baby/child proofing home
Parent interviews
Office work, filing, writing emails to parents, photo copying, writing newsletters, creating and updating your website/blog
Cleaning finger prints off sliding glass doors/windows
Writing contracts and policies
Talking to parents on the phone
Building a business website
Communicating with parents via Facebook
Placing ads on Craigslist and other online classified ad websites
Food Program paperwork
Conducting activities for local family child care association in home
Reading magazines to find recipes
Reading books by Tom Copeland, or reading Tom's blog(!)
Collecting items around the home for craft projects
Planning and preparing children's activities (lesson plans, home decorations)
Decorating playroom for themes and special days
Putting together a daycare scrapbook or photo album
This is not a complete list. You can count hours spent on activities that you would not be doing except for the fact that you are running a business. So, you can count hours spent on putting together a photo album for parents and the children in your care because you would not do this if you weren't in business.
You cannot count hours spent on general house keeping activities: cleaning out the garage, painting a deck, cleaning out gutters, washing the car, mowing the lawn, remodeling, making house repairs, cleaning a pool, defrosting the freezer, cleaning the oven, cleaning windows, etc.
We don't want to get too aggressive in counting hours on activities that would have done anyway.
When you clean areas that are used for both business and personal purposes you can count the business portion of the time, but not all the time. If it takes you 2 hours to clean the kitchen, bathrooms, and living room on Saturday, don't count all of this as business cleaning time. Instead, estimate the time that it took you to clean these areas because of your business - maybe 1 hour. Don't worry about being precise; the important point is not to count the entire 2 hours.
If you have a separate business freezer you could count the time to clean it. If you have a separate play room you could count all the time to clean it.
It's not necessary to carefully track these hours every day of the year. Instead, track these hours for two months each year and use the average from these two months for the rest of the year. In fact, if you didn't keep good records for 2010, it's not too late to track these hours for the next month or so and use the average hours per week for 2010. Then track two more months in 2011 and each year afterwards.
Enter all the hours you worked in your home on IRS Form 8829 Expenses for Business Use of Your Home, line 4.
Tracking the hours you work in your home after the children are gone is probably the single most important record keeping task you can perform that will reduce your taxes the most!
What other business activities do you perform after children are gone?
Image credit: mcnairclean.com
Tom Copeland, www.tomcopelandblog.com
