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IRS Reduces Burden for Family Child Care Providers |
March 2003
No more saving food receipts!
The Internal Revenue Service announced on February 24, 2003 that family child care providers may now choose to use a standard meal allowance rate to claim food deductions instead of keeping detailed records and food receipts. This new rule will significantly reduce the record keeping burden of family child care providers. The IRS estimates that this new rule could save providers approximately 10 million hours of record keeping.
The new rate will adopt the Tier I rate from the US Department of Agriculture's Child and Adult Food Program in effect at the beginning of each calendar year. The rates are higher for Alaska and Hawaii. The Tier I rate is the higher of the two different rates of reimbursement under the Food Program.
Providers can use the standard meal and snack rates for a maximum of one breakfast, one lunch, one dinner, and three snacks per child per day. Any extra meals or snacks beyond these amounts may not be counted when using the standard meal allowance rate. The rule does not give guidance on what constitutes a meal or a snack. Providers can count meals even if they do not meet the nutrition requirements of the Food Program.
Effective Date
The new rule (IRS Revenue Procedure 2003-22) is effective for 2003. However, providers who used the Tier I rates for prior years to claim food expenses will not be challenged by the IRS in an audit.
Redleaf National Institute submitted the idea of a standard meal allowance rate to the IRS Industry Issue Resolution Program in 2002. It was the only proposal accepted in 2002 that affected small businesses. The IRS has written a press release about this new rule. Over the years the Institute has had success in getting the IRS to clarify a number of family child care tax issues.
Who Is Eligible?
All family child care providers are eligible to use this new rate, whether or not they are licensed, registered, or otherwise regulated by their own state or locality. This includes unregulated providers, providers receiving subsidy from their state to care for one or more low income children, and even illegal providers. Providers who are not on the Food Program may also use this new rate.
Providers will now have a choice in how to claim their food expenses. They can use this new standard meal allowance rate or they can choose to deduct their food expenses using the actual cost of the meals. Each year providers can choose either method and switch back and forth from year to year. Before providers decide which method to use, they may want to estimate their own actual food cost per child per meal and compare it with the standard meal allowance rate. If their actual food cost is greater, they should continue to save all business and personal food receipts.
Own Children:
Meals served to a provider's own child may not be counted unless a provider has hired her own child to perform work for her business. In this case the actual cost of the food served to the child may be counted separate from the meal allowance rate. The cost of food served to non-family member employees may also be counted as an actual food cost separate from the meal allowance rate. For example, meals served by a provider to her granddaughter may be counted using the standard meal allowance rate if the grandmother is paid to provide the care and the grandmother is not legally responsible for the upbringing of the grandchild.
Providers may not count meals if the parent of the child supplies the food. If a parent brings part, but not all, of the food for a particular meal, the provider may be able to claim a portion of the meal allowance rate. Providers should use their own reasonable judgment about whether to claim a portion of the meal allowance rate.
Activity Expense vs. Food
The actual cost of food purchased as part of an activity, rather than as a meal or snack, may be counted as an activity expense, rather than as a food expense. For example, the cost of a cake served at a birthday party or the ingredients of a gingerbread house can be deducted separately. But an outing to a Chucky Cheese restaurant where there are a lot of non-food activities should be counted as a meal, not a separate activity expense, because the food served is taking the place of a regular meal served at the provider's home. Providers should use their best judgment to determine if a food expense should be counted as a meal or an activity expense.
Record Keeping
To use the standard meal allowance rate, providers must maintain records that include the name of each child, dates and hours of attendance in care, and the number of breakfasts, lunches, suppers, and snacks served. The Revenue Procedure contains a meal and snack log that providers can use to track this information. Although providers are not required to use this log, they should keep records during the year that contain the same information. Providers can use record keeping systems or other records such as Food Program monthly claim forms, sign in and sign out sheets, parent contracts, and other methods. The most difficult record to keep is probably hours of attendance. Although the IRS log asks providers to track this on a daily basis, providers who keep reasonable attendance records and whose meal counts are not inconsistent with these records should not have a problem if audited.
Food Program
Participation of the Food Program makes even more sense under this new rule. Food Program rules have always required providers to keep track of children's attendance and meal counts (up to three servings a day). Because of this, providers on the Food Program already have most of the records required by the IRS under this new rule. The additional records needed from Food Program participants are hours of attendance and the additional meals and snacks not reimbursed by the Food Program. Perhaps the best place to report this information is on the Food Program monthly claim form. If your Food Program sponsor does not want you to record non-reimbursable meals on this form (for example, an extra afternoon snack), you could enter these meals on your copy of the monthly form.
Providers who keep their food costs low will benefit greatly with this new rule. Providers who spend less on food than the Tier I rate will be able to claim higher food deductions than they can using the actual cost method. Note: Tier II providers can use the Tier I rate for purposes of claiming food deductions, but this will not affect their reimbursement status on the Food Program. They will continue to receive reimbursements based on the lower Tier II rates.
Non-Food Supplies
Providers can continue to claim non-food supplies used for food preparation such as containers, paper products, or utensils. It is important to keep saving receipts for such items. Even though a provider is no longer saving food receipts, she should remember to save any food receipt that also has on it a nonfood item. Some providers and tax preparers currently calculate their food expenses using a flat rate per meal that is higher than the Tier I rate. There is no IRS-approved meal allowance rate other than the Tier I rate as announced in this new rule. Providers who use some other flat rate should expect a challenge from the IRS if they are audited. They should keep the same records as required by this new rule, plus all business and personal food receipts.
Claiming Food Program Reimbursements
The new rule says, "A family day care provider who receives a reimbursement for a particular meal or snack, however, may deduct only the portion of the applicable standard meal or snack rate that exceeds the amount of the reimbursement." This statement can be confusing. It assumes that a provider is not reporting as income her reimbursements from the Food Program. This advice of reporting on the net food deduction is similar to advice found in IRS Publication 587 Business Use of Your Home. In our experience, IRS auditors always want to see the entire Food Program reimbursements reported as income and all food deductions reported as an expense. We strongly advise providers to follow this advice from auditors. Note: Food Program reimbursements received by a provider for her own children are not taxable income, and food served to these children cannot be counted as a deduction.
Final Notes
If you have questions about this new rule, feel free to contact Tom Copland at
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