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Closing for the Summer

by Tom Copeland 

Summer is a time for vacations, family outings, and personal activities such as gardening, reading, and just plain rest. For many family child care providers, summer is a time to reduce their hours of operation. Taking some time off in the summer may be based on personal choice, or it may be a necessity because of a reduced demand for services. Some child care parents may withdraw their children for summer camps or family vacations. Other parents, such as teachers, work fewer hours in the summer and plan to spend more time with their children.

What are the tax consequences of reducing your summer hours?

When you work fewer hours your income will go down. In addition, serving fewer meals and snacks means you will receive less reimbursement from the Food Program. One of the financial challenges of being a family child care provider is managing the ups and downs of your income as parents come and go. Plan ahead when you know that your income will be less in the summer. Try to keep your expenses down during this time. Put aside some of the money you are earning the rest of the year to help you get through the slower summer months.

One of the biggest tax benefits of being a family child care provider is the ability to deduct a portion of your house expenses, including property tax, mortgage interest, utilities, house insurance, house repairs, and house depreciation. The amount of the deduction you can claim for these items is based on your Time-Space Percentage. This percentage is determined by how many hours you work in your home and how much space you are using in your home on a regular basis for your business. If you are closed for a month or two during the summer, this should not make any difference in your space percentage. In other words, if you are using a bedroom for naps on a daily basis for ten months of the year and not at all for two months, you would still count this room as being used on a regular basis throughout the year. If you are closed from a week to several months during the summer, this will have an effect on your time percentage. The fewer hours you work, the lower your time percentage, and ultimately the lower your home business deductions will be. To help reduce this impact, keep careful track of all the hours you work during the summer. Include in this accounting all the hours children are at your home. This may be more complicated to track if you have children attending part days, or on an irregular basis. Also, be sure to record all hours you are spending on business activities when the children are not present, including hours spent on activity preparation, cleaning, meal preparation, and special projects such as painting the playroom, building outdoor equipment, and reorganizing your records.

Regardless of the impact of reduced income and lower home deductions, it is a good idea to take time off each year for yourself. Family child care providers work very hard and you deserve some days of rest. Enjoy!

This handout was produced by Think Small (www.thinksmall.org)

 For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)

Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. ;  Phone: 801-886-2322 (ex 321)

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Don't Guesstimate Your Deductions

by Tom Copeland

"How much of the cost of an item can I deduct as a business expense?" is a common question of family child care providers. In general, providers should use their Time-Space Percentage to determine the portion that is deductible for items used by their business as well as their family. Such items include property tax, mortgage interest, furniture and appliances, toys, supplies, and more.

For some shared business and personal items, however, the Time-Space Percentage should not be used. These special items, called "listed property," include a computer, printer, copy machine, fax, television, VCR, cell phone, and vehicle. For these items providers must calculate an actual business use percent, which means determining what percent of each item was used in the business.

A recent Tax Court case (Fabian Vaksman vs. IRS) clarified how to determine this actual business use percent. The case involved a self-employed taxpayer, not a family child care provider, but the ruling applies closely to providers.

The court quoted a portion of the Tax Code that says that no deduction is allowable with respect to any listed property on the "basis of any approximation or the unsupported testimony of the taxpayer... In order to be allowed a deduction with respect to listed property, the taxpayer must substantiate the deduction by adequate records, or by sufficient evidence corroborating the taxpayer's own statement, showing 1) the amount of such expense or other item; 2) the time and place of the use of the property; and 3) the business purpose of the expense or other item."

In other words, a provider can't guesstimate how much of her computer is used for her business. In the Vaksman case, the taxpayer guessed at his actual business use percent and kept no written records to support his claim.

I have represented some providers in IRS audits where the auditors have allowed providers to use their Time-Space Percentage on their cell phone, computer, and television. This new case may change this in the future. Providers who don't have some written records to back up their deductions are at risk in an audit.

How can a provider substantiate her actual business use percent? A provider should save the receipt showing the purchase price of each item. If the item was purchased before the business began and no receipt (or canceled check) is available, take a picture of the item. Record on a calendar or other ledger book the time and place the item is used for business.

For example, the use of computer can be tracked by recording in what room the computer is located, when it is used for the business and personal purposes, and what types of business activities are conducted on it. This tracking should be done for at least two months to show a pattern for the year. If the computer use varies significantly throughout the year, then the business use should be tracked for more than two months. A provider's calendar might show that the computer was used to enter attendance and business expense records each Friday evening from 8-9pm. In addition, the day care children use the computer to play games from 9-11am, Mondays, Wednesdays, and Fridays. That totals eight business hours a week. The provider's personal use of the computer might be four hours a week (as shown on the calendar), for a total of 12 hours a week business and personal use. The actual business use percent in this example is 67% (8/12).

To track the actual business use of a cell phone, include the hours the phone is taken outside when you are with the day care children or on field trips.

The important point to remember is that it is probably not good enough just to guess how much time the computer, television, or cell phone is used for your business. You need to write down when these items are used for at least two months of the year. Following these guidelines may create more record keeping work for you, but if it helps you in an audit and creates more piece of mind, it is worth it.

This handout was produced by Think Small (www.thinksmall.org)

 For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)

Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. ;  Phone: 801-886-2322 (ex 321)

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Common Family Child Care Business Deductions

by Tom Copeland

Family child care providers are entitled to deduct as a business expense all items that are “ordinary and necessary” in their business. Such items could include:

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.

This handout was produced by Think Small (www.thinksmall.org)

 For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)

Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. ;  Phone: 801-886-2322 (ex 321)

Facebook - http://www.facebook.com/tomcopelandblog

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"Become a member of the National Association for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."

Family Child Care Providers  Must Claim Allowable Deductions

by Tom Copeland

May 2005

Must a family child care provider claim all her allowable deductions on her tax return?

According to two IRS authorities, the answer is "yes."

IRS Tax Code TITLE 26, Subtitle A, CHAPTER 2, Sec. 1402 (a) says, "Net earnings from self-employment — The term 'net earnings from self-employment' means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business..."

IRS Publication 596 (2004) Earned Income Credit says, "When figuring your net earnings from self-employment, you must claim all your allowable business deductions."

The issue of whether or not to claim all allowable deductions usually comes up when determining the earned income credit. Because of the way the earned income credit works, there are circumstances where lower business deductions will increase the credit. As a result, some providers and tax preparers try to increase a tax refund by arbitrarily reducing some business expenses to obtain a higher earned income credit. This is clearly not allowed.

The situation where this issue is more difficult to address is where claiming all allowable deductions creates, or increases, a business loss on your tax return. An IRS agent told me recently that providers should always claim all allowable deductions even if doing created a loss or increased a loss. The problem is that doing so can trigger an audit. The IRS is more likely to audit providers who show business losses, particularly if such losses appear several years in a row. In such audits, it is common for the auditors to disallow deductions.

Therefore, what should you do when confronted with this situation? My advice would be that you should not reduce deductions if doing so will increase the earned income credit. But other than this situation, you should carefully assess whether or not to claim deductions that create or increase a loss. Some providers work 24 hours a day and have a very high Time-Space percentage. It is prudent not to claim some of these hours if doing so can prevent a loss. Other situations where you may not want to claim deductions is where you have an expensive home and thus high house expenses. Between now and the end of the year, the best advice is to keep track of all business expenses by saving receipts and other documents. You can determine at tax time how to handle these records.

As a general rule, I strongly advise providers to claim all allowable business deductions. When you have a business loss, I suggest using some caution.

This handout was produced by Think Small (www.thinksmall.org)

For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)

Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it.   Phone: 801-886-2322 (ex 321)

Facebook - http://www.facebook.com/tomcopelandblog

Blog - http://www.tomcopelandblog.com

"Become a member of the National Association for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."