Deduct your fence

How To Deduct a Fence

By Tom Copeland.

Posted with permission

MAY 25, 2016

Here’s how to deduct a fence that a family child care provider puts up in her back yard.

First: You can deduct a fence because it’s an “ordinary and necessary” business expense. You need to keep children safe or you want more privacy or you want to keep dogs and others out of your back yard that you use for your business.

Second: How much of the fence can you deduct? If your licensor requires you to put up a fence, deduct 100% of the cost of the fence. Get a written statement from your licensor.

If your licensor doesn’t require a fence, you can deduct the business portion of the fence. Determining the business portion can be tricky. If you don’t have young children of your own and you put up the fence solely because of your business, deduct 100% of the cost. If you do have young children of your own, you could take a conservative position and deduct the Time-Space Percentage of the cost of the fence. Or, you could take a more assertive position and claim a higher percentage based on the actual use of the fence. Read my article, “How to Calculate an Actual Business Use Percent.”

Third: When can you deduct the fence? If the fence cost less than $2,500 you can deduct it in one year. If it cost more than $2,500 you must depreciate it over 15 years as a land improvement. However, you can also use the 50% bonus depreciation rule.

Here’s some examples:

$2,000 fence x 100% business use = $2,000 deduction in one year

$2,000 fence x 75% business use – $1,500 deduction in one year

$3,000 fence x 40% Time-Space % = $1,200 x 50% = $600 deduction in first year using the 50% bonus rule. The remaining $600 gets depreciated over 15 years ($600 x 5% first year depreciation = $30). Total depreciation in first year: $630.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.flickr.com/photos/dapaw/0

The start up rule

How to Handle Expenses Before Your Business Begins: The Start-Up Rule

By Tom Copeland, posted with permission

Let’s say before your family child care business began you bought a computer, a dining room chair, a toy and a smoke detector.

What are the rules to follow in deducting these items?

The answer depends on the cost of an item and whether or not you bought it to help you start your business.

Items Purchased to Help Start Your Business

Items costing less than $2,500
If you bought an item for less than $2,500 to help you start your business, it’s considered a start-up expense. Examples include advertising, children’s books, business name registration fees, first aid kit, supplies, training workshop fees, and so on.

Basically, if you are buying small items to help you to get ready to open your business, it’s a start up expense. 

You can deduct up to $5,000 of start-up expenses in the year your business begins. For example, let’s say a provider buys $1,000 worth of small toys (none costing more than $100 each), $50 for a child development workshop, $80 for storage boxes, and $300 in arts and craft supplies in the summer of 2015. If she starts her business in July 2016 she will be able to deduct the full $1,430 on her 2016 tax return. This assumes she is using all of these items 100% for her business. Start-up expenses in excess of $5,000 must be amortized over 180 months (15 years).

If you did not use the item at all until your business began, deduct the purchase price. But what happens if you personally use any of these items before your business began? In this case, you must estimate the fair market value of the items at the time you business did begin before you deduct it.

For example, if you personally used the storage boxes ($80) in December 2015, you would estimate their value in July 2016 once you began using them in your business. Perhaps they would be worth $50 by then. If you use the storage boxes for both business and personal use once your business begins, multiply the $50 by your Time-Space Percentage to determine your business deduction.

If you put the storage boxes in your basement and only began using them for your business in July 2016, you would deduct the full $80.

Items costing more than $2,500

If you buy items that cost more than $2,500 (computer, swing set, washer, dryer, furniture, etc.), you must depreciate them. Depreciation means you claim a portion of the cost as a deduction over a number of years.

Most household items are depreciated over seven years. For details on depreciation rules, see my article “The Categories of Depreciation.”

It doesn’t matter if you bought these items to help you start your business or not. In most cases you will have to depreciate them. (See my article that describes an exception to this rule.)

If you bought the item before your business began, use the value of the item when it is first used in your business.

Items Not Purchased For Your Business

Family child care providers will have a house full of furniture, appliances and hundreds of household items at the time their business begins. You are entitled to depreciate all of these items once they are used in your business. You must depreciate them, even if their original cost was less than $500.

If you purchase an item after your business begins that costs $2,500 or more, you must follow the regular depreciation rules.

You will gain a lot of business deductions if you do a household inventory of all items in your home before your business begins. See my article on how to do this.

Summary

Confused? Here’s a summary:

Items purchased before your business began to help you start your business
* Cost less than $2,500 – deduct in one year (start-up expenses limited to $5,000)
Example: $40 toy purchased in 2015 and first used in 2016 when business begins. Deduct in 2016.
* Cost more than $2,500 – depreciate
Example: $3,000 swing set purchased and used personally in 2013. Used for business and personal use in 2016. Estimated value when first used for business: $2,000. Depreciate using your Time-Space Percentage on $2,000 in 2016.

Items Not Purchased For Your Business
Estimate the value of the item at the time it is first used in your business and depreciate it. Apply your Time-Space Percentage if it’s used by your family and your business.
Example: $50 rocking chair and $400 freezer used both for business and personal use. Multiply by your Time-Space Percentage and depreciate both.

Although this is a relatively complicated issue, claiming start-up expenses and other deductions for items purchased before you started your business is well worth your time.

Tom Copeland – www.tomcopelandblog.com

Mistakes of your tax return.

Don’t Make These Mistakes on Your Tax Return

By Tom Copeland. Posted with his permission

Tax preparers can make mistakes.

Many mistakes are the result of not understanding the unique tax rules affecting family child care providers.

This is the time of year I hear from providers who have met with their tax preparer and have questions about whether their tax return has been done correctly.

Here are some of these mistakes:

Not entering hours on Form 8829 Expenses for Business Use of Your Home

One tax preparer counted all of a provider’s space as “exclusive” use space on line 1 of this form. As a result, he entered no hours on line 4. This would have been the correct way to fill out this form if it was any business other than family child care. All family child care providers must enter the hours they work in their home on line 4.

Not subtracting the value of land when depreciating the home

All family child care providers should depreciate their home on Form 8829. Line 36 is where to put the purchase price and line 37 is where to put the value of the land at the time of the purchase. Make sure there is a number on line 37.

Claiming 100% of household items such as supplies, as well as toys, repairs, etc.

Although providers can deduct a portion of hundreds of household items, they can’t deduct 100% of such items unless they are used 100% for your business. For shared business and personal expenses, use your Time-Space Percentage. When you are giving your tax preparer amounts that you spent on various items, be sure to indicate whether the amounts are 100% business or shared.

Not deducting items you are entitled to deduct

Yesterday a provider told me she was considering buying a generator for her home because the power goes off several times a year. Her tax preparer said she wouldn’t be able to deduct it. A generator is clearly an “ordinary and necessary” expense for a family child care provider. You can’t run your business without electricity and you don’t want food to spoil!

Recommending that providers not join the Food Program because they will end up paying more in taxes

This is terrible advice that I keep hearing about. Yes, your taxes will be higher if you join the Food Program, but you will have more money in your pocket after you pay these taxes. If parents paid you more money your taxes would also go up, but I doubt that you would refuse the money.

Depreciating items costing less than $2,500

A new IRS rule allows you to deduct in one year any item costing less than $2,500, rather than depreciating it. See my article on this.

Defend yourself

Don’t give up simply because your tax preparer says something you don’t agree with. Ask him/her to show you an IRS document that supports their position. See my article: Do You Know What is On Your Tax Return?”

The Child Care Business Partnership

I am learning about these tax preparer mistakes while helping members of The Child Care Business Partnership. One of the member benefits is that I can review a provider’s Minute Menu records and tax return where I regularly find these errors. Once identified, the provider can get them corrected and save money. To learn more about the benefits of membership, click here.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.flickr.com/photos/fortrucker/

Mistakes on child care returns

Common Mistakes Made On Family Child Care Tax Returns

By Tom Copeland. Posted with permission.

In the past two weeks I've seen these common mistakes made by family child care providers on their tax returns:

* 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

Image credit: blogs.angloinfo.com

My 2014 Family Child Care Tax Workbook and Organizer offers line-by-line instructions on how to fill out all of your federal tax forms. 

Tax changes starting 2014

New Depreciation Rule starting in 2014 Will Save Providers Time and Money!

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

Household Deductions

All businesses can deduct expenses that are “ordinary and necessary” for their business. The definition of ordinary and necessary is helpful, typical, appropriate and useful for the business.

Since your business is providing a home learning environment for children, you are entitled to deduct hundreds of household items used in your business. This includes furniture, appliances, kitchen equipment, cleaning supplies, cable television, law care, service contracts on your appliances, new door bell, bedding, towels, floor polish, and so on.

Because of this, you should save every receipt for items that have anything to do with cleaning, repairing, or maintaining your home as a home

Note: You can only deduct a portion of items used personally as well as for your business. Use your Time-Space %.

Business Use of Your Home

You are entitled to deduct a portion of the costs associated with your house: property tax, mortgage interest, utilities (gas, oil, electric, water, garbage), house insurance, house repairs, house depreciation, and house rent.

Claim the Time-Space % of these expenses on IRS Form 8829 Expenses for Business Use of Your Home.

Your Time-Space % is based on the number of hours you use your home for business and the number of square feet your use your home for business on a regular basis.

Time

Your business is the only one that must add up all the hours you use your home for business activities.

You can count all the hours day care children are present in your home. Count from moment the first child arrives until the last child leaves. Count the extra time if parents pick up their children late, children stay overnight, or children come to your home on weekends to play.

You can also count all the hours you use your home for business activities when children are not present. This includes hours spent on cleaning, lesson planning, parent interviews, record keeping, meal preparation, parent phone calls, time on the Internet, and so on.

Hours spent away from the home shopping or taking children to school cannot be counted.

Space

Unlike all other home-based businesses, you can claim a room as a business room if it is “regularly” used for your business. Regular use means using it for your business about two-three times per week. Children do not need to be in a room for you to count it as regular use (storage room, office, garage, laundry room, etc.). Such rooms can still be counted as regular use even if your state child care licensing rules prohibit children from entering them.

It’s not unusual for many providers to use all of the rooms in their home on a regular basis for their business.

All other home-based businesses can only count rooms that are used “exclusively” for their business. However, family child care is the only business that can have both “regular” use rooms and “exclusive” use rooms. If your tax preparer challenges this, tell him or her to look at the Instructions to Form 8829, page 2 under the heading “Special Computation for Certain Daycare Facilities.”

Food Program and Food Expenses

Family child care is the only home-based business that has the CACFP Food Program. All providers are better off financially if they join the Food Program.

Food reimbursements received from the Food Program are taxable income. Exception: reimbursements received for your own children are not taxable income.

You can deduct up to one breakfast, one lunch, one supper, and three snacks per day, per child (if you serve them). Food served to your own children is never deductible.

Meals or snacks that are not reimbursed by the Food Program do not have to be nutritious.

You do not need to save any food receipts if you use the standard meal allowance method for claiming food expenses. See my article, "How to Claim Food Expenses."

You must keep a daily record of all meals and snacks served to your daycare children, particular those for which you are not reimbursed by the Food Program.

Depreciation

You always want to depreciate your home because house depreciation represents a substantial business deduction for you each year.

You are entitled to depreciate your home if you are licensed, have applied for a license or are exempt from child care licensing rules. Therefore, even if you only care for one or two children and are not required to be licensed, you can still claim house depreciation.

When you sell your home you will owe tax on the depreciation you claim, or are entitled to claim. Don’t let your tax preparer talk you out of claiming this depreciation.

You are entitled to depreciate all household items you owned before your business began that you later use in your business. This can include furniture, appliances, pots and pans, wall decorations, tables, chairs, beds, and so on.

The IRS has announced a relaxing of depreciation rules that will benefit all family child care providers.

Starting in 2014, providers can avoid depreciating items costing $500 or less. Instead, they may deduct them in one year.

This change will result in higher business deductions in 2014. It will also make it easier to avoid the time consuming challenge of trying to understand the complex depreciation rules and calculating the correct depreciation amount.

In previous years the IRS rules said that providers who purchased items lasting longer than one year should depreciate them. As a practical matter, the IRS allowed providers to deduct items that cost less than $100 in one year. I've advised providers to follow this unwritten rule for years and had never run into trouble in IRS audits.

There are two parts to the new rule.

$200 Rule

In 2014 providers can deduct in one year any item costing $200 or less. For example, a provider who purchases a $180 rug in her living room that is used by both her business and her family can deduct the Time-Space Percentage amount in 2014. If her Time-Space Percentage was 40%, she could deduct $72 in 2014 ($180 x 40% = $72).

$500 Rule

Starting in 2014, providers can deduct in one year any item costing $500 or less if they keep the following statement in their tax files for 2014:

"Section 1.263(a)-1(f)  of minimums safe harbor election - I am using the safe harbor rule under this Section for items I purchase for my business in 2014 that cost $500 or less."

Put the date you wrote down this statement, your address, taxpayer identification number and sign it. Save it with your other 2014 tax records. Revise the same statement for each tax year.

  

For example, if a provider buys a $480 table (new or used) that is used by her business and her family (with a Time-Space Percentage of 40%) she can deduct $192 ($480 x 40% = $192) on her 2014 tax return.

Using this new rule is voluntary. If the above provider chose to depreciate the $480 table under the normal rules of depreciation, should would claim $27.44 ($480 x 40% = $192 x 14.29% [year 1 of 7 year MACRS rules] = $27.44).

Multiple Items on One Invoice

Providers can also avoid depreciation on invoices of more than $500 if there are multiple items on the invoice that identifies the price of individual items.

For example, let's say a provider (with a Time-Space Percentage of 45%) buys six new windows and the invoice reads: "Six windows at $400 each = $2,400." She can deduct $1,080 ($400 x 45% = $180 x 6 = $1,080).

Normal Depreciation Rules

Normal depreciation rules remain in effect for 2014, including the Section 179 rule.

Providers can continue to depreciate items costing more than $500 using the normal rules of depreciation: office equipment (5 years), furniture/appliances/equipment (7 years), fence/patio/driveway (15 years), home improvements/home (39 years). See also my articles : The Categories of Depreciation and "How to Depreciate Your Home."

The Section 179 Rule allows you to deduct in one year items that are used more than 50% of the time in your business. You cannot use this rule for land improvements, home improvements, and the home.

The 50% bonus depreciation rule has been extended to 2014. It was originally set to expire at the end of 2013, but was extended by Congressional action in December 2014. 

* The standard meal allowance rate for 2014 is: $1.28 breakfast, $2.40 lunch/supper and $.71 snack. Use this rates for all meals and snacks served in 2014 (including meals and snacks not reimbursed by the Food Program). You may deduct up to one breakfast, one lunch, one supper and three snacks per day, per child.

* The standard mileage rate for 2014 is $.56 per business mile. The rate for 2015 is $.575 per business mile. 

* The income limits to qualify for the IRS Saver’s Credit has increased to $60,000 (adjusted gross income) for couples filing jointly; $45,000 for heads of household; and $30,000 for individuals or married people filing separately.

* Note: Under a 2013 “Simplified Method Rule ” providers can claim up to $1,500 in house expenses without saving any records, or filing IRS Form 8829 Expenses for Business Use of Your Home. However, the vast majority of providers should not use this rule and should continue to claim their house expenses on Form 8829.

There are several ways a family child care provider can reduce her taxes before the end of the year.

The goal is to accelerate your deductions in this year and delay income until the following year. Here are some ideas:

1) Stock up on business supplies and materials before the end of the year. These can include: arts and crafts supplies, cleaning supplies, kitchen supplies, curriculum materials, and so on.

2) Ask parents to pay you in 2015 for the last several weeks of December. Money you receive in the next year for child care delivered in this year is reported by you as taxable income on your following tax return.

3) The sooner you make a contribution to an IRA, the more money you will have at retirement. You can set up a Traditional IRA or SEP IRA before April 15, 2015. Any contributions you make to these IRAs before then will reduce your personal taxable income.

If you set up or contribute to a Roth IRA you won't reduce your taxes this year, but you will save money later when you withdraw the contribution and interest at retirement tax free.

4) If you make contributions to a charitable organization before the end of the year, you may be able to reduce your personal taxable income if you can itemize your taxes.

Follow these simple steps to save a little more money in yours tax!