ALL ABOUT DEDUCTIONS
Common Family Child Care Business Deductions
Outdoors
Lawn mower, rake, garbage bag to put leaves in, garden hose, trees, fence, repairing driveway, paint outside of house, new siding, snow shovel, show blower, lawn care service, etc.
Living Room
Curtains, shades, blinds, rug, couch, chair, lamp, end table, bookcase, pictures on the wall, television, ceiling fans, window, piano, etc.
Kitchen
Pots and pans, silverware, dishes, cups, toaster, microwave, refrigerator, blender, utensils, stove, dishwasher, garbage disposal repair, garbage bags, Tupperware, table, chairs, etc.
Bathroom
Towels, washcloth, soap, toilet paper, light bulbs, rug, toothpaste, toothbrush, bathroom scale, etc.
Bedroom
Bed, bedding, pillows, rug, radio, dresser, lamp, end table, pictures on the wall, etc.
Playroom
Toys, children’s furniture, rug, window air conditioner, television, DVD player, DVDs, rocking chair, stroller, etc.
Office
Computer, copier, desk, chair, file cabinet, carpet, etc.
Garage/Basement
Tools, holiday ornaments, freezer, garbage can, toys, washer, dryer, grill, etc.
An item is only deductible if it is actually used in the business. Not all expenses are deductible for every provider.
There are times when a tax preparer or the IRS will tell you that you can't deduct something on your business tax return.
When this happens, ask this question: "Why can't I deduct it?"
Sometimes you will hear this answer:
"You can't deduct _____ [names a household item] because you would be using it if you weren't in the family child care business."
This answer is wrong and let me explain why.
Ordinary and Necessary
The first response you want to give to someone who tells you that you can't deduct an item is "Can you refer me to something in writing that supports your position?"
More often than not, the person will not be able to.
There is nothing in the IRS code or any IRS publication that says you can't deduct something unless you bought it specifically for your business, or you would use it even if you weren't in business.
You can deduct an item if it's ordinary and necessary for your business, even if you would still use the item if you weren't in business. I've been defending providers in IRS audit for decades and I've never seen the IRS successfully argue this faulty position.
You can deduct an item based on how it's used in your business, not why it was purchased or the fact that it's also used personally, and will continue to be used personally after you are out of business. After you have retired you will continue to use your furniture and appliances and kitchen utensils and welcome mat and lawn mower and so on. They are still deductible while you use them in your business.
The Truth About Claiming Business Deductions
“The most of Tax preparers have no idea how to fill child care taxes. And often, IRS agents, also
Have you ever heard this from your tax preparer or another family child care provider?
"You can't deduct that because you use it for personal purposes."
"You can't deduct that because you owned it before your business began."
"You can't deduct your house expenses because you are not licensed."
"You can't deduct food expenses because you are on the Food Program."
I have. I've even heard them from IRS agents.
They are all false.
The IRS Child Care Audit Technique Guide is a publication used to train IRS auditors on how to audit family child care providers. It contains a lot of clarifying information that will help us find out what the truth is for the above statements.
"You can't deduct that because you use it for personal purposes."
The Audit Guide says, “It is important to stress the fact that having a personal usage element present does not disqualify the property from being a deductible IRC Section 162 expense.” IRC Section 162 allows businesses to deduct “all ordinary and necessary expenses” for their business.
Ordinary and necessary means: common, accepted, helpful, and appropriate. The Audit Guide lists allowed expenses such as soap, kitchen equipment, furniture, appliances, piano, VCR, television, office supplies, and cleaning supplies. Clearly, these items are used for personal purposes.
"You can't deduct that because you owned it before your business began."
The Audit Guide says, “For many providers, when they start their business many items which were personal use only are used in the business. They are entitled to depreciate the business use portion of those assets. … The fact that the asset was only used for personal purposes prior to being placed in service does not disqualify it from being converted to use in the business.”
"You can't deduct your house expenses because you are not licensed."
To claim house expenses, Internal Revenue Tax Code Section 280A(c)(4)(B) says, “The provider must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a day care center or as a family or group day care home under state law.”
This language is repeated in The Audit Guide and in IRS Publication 587 Business Use of Your Home. So, if you applied for a license in 2014 and didn't get your license until 2015, you can still deduct your house expenses on your 2014 tax return.
"You can't deduct food expenses because you are on the Food Program."
In 2003 the IRS issued a ruling (IRS Rev. Proc. 2003-22) that established the standard meal allowance rate. It says, “The rates [standard meal allowance rate] apply regardless of whether a family day care provider is reimbursed for food costs, in whole or in part, under the CACFP, or under any other program, for a particular meal or snack.”
Summary
The Audit Guide is not the final word on these statements, as new Tax Court decisions or other IRS documents may offer new clarifications. However, you can use the Audit Guide in conversations with your tax preparer or auditor to make a persuasive case in your defense.
Therefore, if you hear someone make one of the above statements, or any other statement that you are not sure is correct, ask the person, "Where does it say that?" If the person can't back up what they are saying with some written IRS document, you should not accept their position.
IMPORTANTS POINTS TO MAKE YOUR TAXES
By Ángel Olmedo
The taxes of a child care provider are really complicated. Do not go to places where make it free or cheaply, because they can not dedicate the necessary attention.
If you are doing it, for the first time, the expert in taxes needs about 3 hours to make it. If you already have all your information in your computer, you can make it in an hour. A good accountant will charge about $ 350 for make it the first time.
The taxes of each year are related to the previous year. Find yourself a good, solid accountant, and stay with him. Make sure that the accountant will respond if there are problems or he will help you in an IRS audit. Avoid change every year. If you change, you must bring him the "income taxes" of the previous 3 years. The accountant needs to know how much has been the devaluation of your home, car, valuables you use in your business, and if you is declaring miles or actual expenses.
Many accountants don’t have a computer program that allows him calculate properly the "percentage space / time" for deduct a portion of their indirect costs, such as rent or "morgage" billes, your car costs, or devaluation of your house. Many accountants don’t make the calculation, simply put 25%. But it can be much higher if you have a zone only for child care (even just a closet), or if you make 2 turns caring. Make sure that you enter in the space calculation all that is used only for child care. The difference can save you thousands of dollars.
But make yourself your calculation. You need to measure every room in the house, including basement, top terrace, garage attached to the house, and make the addition of your house, the space used only for child care, the space used occasionally for the child care, and the time spent using every day for business.
You pay taxes for the benefit of your business. The benefit is the addition of yours incomes of your business, less the business expenses, direct or indirect.
Take annotated all their income, such as you paid for driver to Illinois (YWCA), which paid of the food program, "scholarships" to have received payments of private clients.
Add up all your direct costs, such as items that you purchase for your business. You can calculate your deduction for meals served by the number of meals served. You can calculate your car expenses for the miles you have used for your business. Add up by category not by months.
Add up all their indirect costs as "Bills" and shared expenses for his house and your business. Add up by category not by months.
Check the attached sheet. The accountant will need all that information to make your taxes correctly. If you don’t use all that information you are overpaying.
Make sure that accountant enters all information correctly. The times that the IRS has questioned some "income tax" that I've done, it has been because the names or numbers of social dependents were poorly written, or badly written in previous years. Also, the IRS has rejected two "income tax" because I did put a person as a dependent made his own "income tax" and called as an independent.
Make sure that the accountant enters part of payments of your home as a business expense. The unused portion should put it as a business deduction, but you should not put all your house payments as a deduction, because you pay more.
If you are doing your taxes and you discover that the previous years they did wrong and overpaid, remember that you can change your taxes of the past 3 years. Remember also that the IRS may revise your taxes for the last 3 years. We recommend saving your income tax for five years.
If you need help, call Ángel Olmedo at 773-867-7387 for quick questions about child care taxes, or send by E-mail to aolmedo@childserv.org.
Tax Questions Answered
Can I deduct my monthly mortgage payment?
You are able to capture the principle payments (that are part of your monthly mortgage payment) when you depreciate your home on Form 8829.
Can I deduct 100% of my family child care union dues?
-Yes. In some states family child care providers have organized into unions and pay monthly union dues. These expenses can be deducted on IRS Form Schedule C, line 17 Legal and Professional Services. Some child care providers are not a member of a union, but are having "fair share" fees deducted from the payments they receive from the county for caring for children from subsidized families. You cannot deduct these "fair share" fees as a business expense. Instead, you are receiving less income and, as a result, you will pay less in taxes.
I bought some clothes (t-shirts, gloves, coats) for my day care children. Can I deduct this?
-It depends. If these items are given to the children for them to take home they would be considered "gifts" and are subject to a limitation of $25 per child, per year. There is a difference between a "gift" and an "activity expense". If these items were purchased for the children but kept in your home so they can be used by other children, then there is no $25 gift limitation and the items could be fully deducted as an activity expense.
We are planning on fencing on our entire front lawn, making it a nature exploration area for daycare. Can this entire expense be used as daycare since it will be used for daycare purposes only?
It would be hard to argue that a fence in a front yard is only used for daycare, unless you have no young children of your own and you never use the front lawn area for personal purposes.
We are a small Day care for 6 children, What Document should we give to the parent to do their taxes? Should we give to them an account statement with the total that they paid for year o every three month?
Give parents an end-of-year receipt that indicates how much they paid you for the year. Give them your Employer Identification Number (EIN) and have them sign one copy that you keep for your files. There is no particular form to use when creating this receipt. You could use IRS Form W-10 and add to it how much the parent paid.
Regarding Mortgage Interest on form 8829, my tax preparer - had entered it on line 16b "Excess mortgage Interest" I told her it should be on line 10b. She said it doesn't make any difference? Is that correct?
It won't make any difference since they are both multiplied by your time-space %. So, don't worry about this.
I pay rent where I live, am I able to deduct it with time-space%?
Yes, you can deduct the time-space% of rent, whether you rent a house or apartment.
How to Deduct Your Tax Preparer Fees
You can deduct as a business expense the cost to file your business tax forms on Schedule C.
You can deduct the cost to file your personal tax forms on Schedule A.
Therefore, ask your tax professional to break out your tax preparation fee into two parts: the fee to prepare your business tax forms and the fee to prepare your personal tax forms.
Report the cost of filling out your business tax forms on IRS Schedule C, line 17 (Legal & Professional Services). The business tax forms include: Schedule C, Form 4562 Depreciation and Amortization, Form 8829 Expenses for Business Use of Your Home, and Form 1040SE Self Employment Tax.
Your tax professional may have filed other business forms for you if you sold property (including your home), hired employees (payroll tax forms), amended your tax return (Form 1040X) or recaptured previously unclaimed depreciation (Form 3115). If so, include the cost to prepare these additional tax forms as a business expense.
Your personal tax forms would include Form 1040 U.S Individual Income Tax Return, Schedule A Itemized Deductions, and all other forms not directly related to your business. The fee to fill out these personal tax forms can be deducted as a miscellaneous itemized expense on Schedule A.
When to Deduct Fees
Since you paid your tax professional in 2014 to do your 2013 tax return, you must claim this expense on your 2014 tax return. For your 2013 tax return, you can deduct the amounts you paid in 2013 to have your 2012 taxes done.
Is Your Donation to Goodwill Deductible?
Each year many Americans give used clothing and household items to charities such as Goodwill and the Salvation Army.
Doing so helps out families in need and the donor gets a charitable tax deduction if they itemize using the Schedule A tax form. The charitable deduction is based on the value of the items at the time of the donation.
But when family child care providers make donations of used items to charities the tax consequences are much more complicated.
You cannot claim a charitable contribution for an item that you have already fully deducted as a business expense. Doing so would be getting a double tax benefit for the original purchase price.
Let's look an an example: Someone who is not a child care provider buys a toy for $50 for her own children. Several years later she donates the toy to Goodwill. At that time she estimates that the toy is worth $10 and she claims a $10 charitable deduction.
A family child care provider buys a toy for $50 and uses it exclusively in her business. She deducts $50 on her tax return as a business expense. Several years later she donates the toy to Goodwill. She can't claim the $10 charitable contribution because she has already deducted the full cost.
Larger Charitable Donation
What if the provider bought a sofa for $800, depreciated it as a business expense and then donated it to Goodwill? Can she claim a charitable contribution? Maybe.
The provider must estimate the value of the used sofa at the time of the donation and compare this number with the adjusted basis of the sofa. She can then claim as a charitable contribution the lower of these two numbers.
What does "adjusted basis" mean? Glad you asked! The adjusted basis of an item is the purchase price minus the amount of depreciation that has been claim on the item.
Furniture and appliances are normally depreciated over 7 years. If this provider had the sofa for five years, and her time-space percentage was 40%, here is what she would have claimed in depreciation:
Year 1: $800 x 40% = $320 x 14.29% = $45.73
Year 2: $800 x 40% = $320 x 24.49% = $78.37
Year 3: $800 x 40% = $320 x 17.49% = $55.97
Year 4: $800 x 40% = $320 x 12.49% = $39.97
Year 5: $800 x 40% = $320 x 8.93% = $28.58
Total depreciation claimed: $248.62
Her adjusted basis is the purchase price ($800) minus the depreciation claimed ($248) or $552. If she estimates that the value of the sofa at the time of the donation was $300, she can claim a $300 charitable contribution because it's less than $552. If she estimates that the value of the sofa was $600, she could only claim a $552 charitable contribution.
One More Example
A provider buys a toy for $50 toy and uses it for both business and personal purposes. Her time-space percentage was 40% and she deducted $20 as a business expense in the year she bought it ($50 x 40% = $20). At the time she donates it to charity she estimates the toy is worth $10. To see if she can claim a charitable contribution she compares $10 with the adjusted basis of the toy.
The adjusted basis is the purchase price ($50) minus the amount she has already deducted ($20) or $30. Since $10 is lower than $30 she can claim a $10 charitable contribution. She can't claim a contribution higher than $30.
When Are Education Costs Deductible?
You might think that classes related to your family child care business (child development, curriculum, record keeping, parent communication, etc.) would be deductible education expenses.
Not necessarily.
Classes or workshops that you take before you licensed are deductible, but classes or workshops that you are required to take to get a license are not deductible. So if you take a class on child development before you are licensed, it is deductible. However, if state law says that you have to have taken a class in child development before you can get licensed, then it's not deductible. Classes that you are required to take after you are licensed to maintain your license are deductible.
Any training you receive after you meet your state's child care regulations is deductible as long as the training is related to your business (not classes on chemistry or engine repair!). Such training classes are deductible even if they don't qualify for training credit according to your local regulation requirements. In other words, if you take a class on record keeping that doesn't count towards your state training requirements, this class is still deductible.
All costs associated with obtaining NAFCC accreditation or a CDA are always deductible. Any classes to increase your skills to run your business are deductible. Classes offered by your local child care resource and referral agency are deductible.
College Education
You cannot deduct the cost of classes you take to receive a post-secondary undergraduate degree (any degree after high school) if this is your first post-secondary degree. The reason you cannot deduct this is because the degree qualifies you for a new occupation.
If you take college classes but are not trying to get a degree (classes on child development, for example), then they are deductible. If you already have a post-secondary degree and you are taking classes that qualify you for a second college degree (a degree in early childhood development or a masters degree in education, for example), then these classes are deductible.
(Yes, IRS rules can be complicated!)
I strongly recommend that family child care providers take every opportunity to improve their skills by enrolling in professional development classes and obtaining educational credentials such as the National Association for Family Child Care Accreditation, the Child Development Associate (CDA), and post-secondary degrees in early childhood education.
Time
If the cost of your class is deductible then you can also count any time you spend on homework in your home when children are not present. If the class is not deductible this time does not count.
Deducting Losses from a Natural Disaster.
As we watch the news of another approaching hurricane we are again reminded of the terrible damage that can be caused by a natural disaster.
Natural and man-made disasters can strike a family child care provider's home at any time: fire, flood, storm, theft, earthquake, tornado, hurricane, or car accident.
Perhaps the only positive thing that can arise from such disasters is the fact that you may be able to deduct the cost of damage, destruction, or loss of your property.
Such casualty losses can include damage to your home, furniture, appliances, equipment, toys, etc. Related expenses that result from a casualty loss, such as the treatment of personal injuries, cleanup and minor repairs, temporary housing, rental car, replacing spoiled food, etc. may also be deductible.
You must file a timely homeowner's insurance claim before you can deduct these costs. If your insurance fully covers these losses, you can't claim any losses. If your insurance doesn't fully cover them (if you must pay a deductible, or if you are underinsured), then you may be able to claim some business deductions that will reduce your taxes at the end of the year.
Your losses should be divided into personal and business losses. If the property destroyed was only used by your family, it's a personal loss. If it was only used by your business it's a business loss, and if it was used by both, it's both a personal and business loss.
If the hurricane or other disaster causes you to have to shut down your business temporarily, you cannot deduct your loss of income as a business expense on your tax return. You will report less income on your tax return and therefore pay less in taxes. Your business liability insurance policy may provide coverage that pays you for some of your loss of income.
In general, you can only deduct personal losses that are in excess of $100 and total more than 10% of your adjusted gross income. Because of this high threshold (a family with an adjusted gross income of $30,000 would only be able to deduct personal losses in excess of $3,000), it is difficult for some providers to deduct personal losses.
Business losses are claimed on Form 4684, Section B. Providers can more easily claim business losses because there is no income threshold. If an item is completely destroyed, the business loss is determined by taking the purchase price of an item, minus the depreciation already claimed on it (or entitled to be claimed on it).
For example, if an uninsured child care provider purchased a swing set for $1,000, had a Time-Space Percentage of 40%, and depreciated it for two years before it was destroyed in a fire, the business loss would be $245 ($1,000 x 40% = $400 - $155 [two years of depreciation deductions] = $245). If the provider received an insurance payment of $100 for this item, the business loss would be $145.
If you buy items to replace the property that is destroyed or damaged (furniture, appliances, etc.), you can begin to depreciate these items. For example, if the child care provider bought a new swing set for $2,000, she would start depreciating in the year she replaced it.
To help make a faster recovery from a disaster, be sure to keep receipts of all equipment and household purchases.
Depreciation is the most complicated tax issue family child care providers face.
