Common Mistakes Made On Family Child Care Tax Returns
By Tom Copeland. Posted with permission.
* Not deducting car loan interest
* Counting time spent shopping
* Not depreciating items owned before the business began
* Claiming 100% of household supplies
I've been reviewing the tax returns of family child care providers who are members of The Child Care Business Partnership. If you join (or renew) the Partnership before March 1, 2015 I will review your Minute Menu Kids Pro tax reports and/or your tax return for free!
Common Mistakes
Car loan interest: Many providers who are self employed fail to deduct the business portion of their car loan interest, even when using the standard mileage rate to claim car expenses.
Time percent: You cannot count hours spent on business activities outside of your home (shopping, attending training workshops, meetings in other provider's homes, etc.). This is because your Time-Space % is used for house expenses and when you are away from your home, even when it's for a business purpose, you are not using your home.
Property depreciation: Every Minute Menu report and tax return I looked at failed to claim depreciation on household items owned by the provider before she started her business. This is a big deduction that you should not overlook. See my article "Conduct a Household Inventory To Save Money."
Household supplies: Many providers try to deduct 100% of their household supplies (toilet paper, paper towels, cleaning products, laundry detergent, etc.). Since these items are also used personally you must apply your Time-Space % before deducting them. If you buy these items separately for your business and personal use, keep receipts for all business and personal purchases.
Depreciation: A number of providers entered items that cost less than $500 into the depreciation section of Minute Menu Kids Pro. You do not have to depreciate items costing less than $500. See my article on this topic. Entering a $400 table or couch into Minute Menu Kids Pro can be confusing because you are likely to choose the expense category of "Furniture/Appliances." But, any items entered there will be treated as something to depreciate. Instead, enter items costing less than $500 under "Household Items."
Space percent: One provider didn't claim a bedroom and laundry room as regular use in her business. She was entitled to count the entire bedroom because she used it to store a lot of daycare items. Her laundry room is also regularly used by her business. Day care children do not need to be in a room for it to be considered regularly used in the business. Even rooms that licensing rules prohibit children to enter can be regularly used. See my article"How to Calculate Your Space Percent."
Hours when children are not present in home: Most providers did a poor job of recording the hours they spent on business activities when children were not present in the home. Try to keep at least two months of daily records for such activities as: cleaning, activity preparation, record keeping, meal preparation, time on the Internet (reading my blog!), parent interviews and phone calls, etc. See my article "The Single Most Important Thing You Can Do To Reduce Your Taxes."
Home depreciation: Many providers failed to claim depreciation on their home. This is a large deduction that you don't want to miss. Some of these providers had never claimed house depreciation. I told them to file IRS Form 3115 to recapture any previously unclaimed depreciation. See my articles "Should You Depreciate Your Home?" and "How to Claim Previously Unclaimed Depreciation."
Mileage: You can't claim trips to the gas station to get gas or have your oil changed as business miles, unless the overall use of your car is more than 50% business.
Actual business use percent: Some providers claimed different actual use percentages for items such as water (55%), cable television (65%), electricity (80%), and so on. Although you can calculate an actual business use percent on some business items, you should only do so if you have tracked the actual use for at least a month or two. This means recording on a calendar or some other place the business and personal use. Although you could do this for the use of the television or cell phone, it becomes extremely difficult to try to do for utility expenses. Typically, providers will use their Time-Space % for all shared items. See my article "How to Calculate an Actual Business Use Percent."
Estimated tax payments: You cannot deduct any quarterly estimated tax payments as a business expense. Do not enter these expenses into Minute Menu.
Tax preparation fees: You can only deduct the cost to have your business tax forms completed by a tax preparer. These forms include: Form 4562 Depreciation, Form 8829 Expenses for Business Use of Your Home, Schedule C, Schedule SE, Form 3115, and any payroll tax forms. Get your tax preparer to break out the cost of doing these forms from your other personal tax forms. If you use TurboTax, apply your Time-Space %.
Nobody ever said preparing a family child care tax return is easy. Try to avoid these common mistakes.
To get your free review of your tax return and/or Minute Menu yearly reports, join or renew The Child Care Business Partnership. The annual $15 fee is tax deductible and I'll refund it if I can't save you at least $15 in taxes! Members of the Partnership also get access to nineteen instructional videos on how to use Minute Menu Kids Pro software more effectively.
Tom Copeland - www.tomcopelandblog.com
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