The child and adult care food program

The Child and Adult Care Food Program.

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

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!