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Choosing a Tax Professional

Here are some tips on finding a tax professional:

There are three national tax professional organizations that offer state listings of their members: the National Association of Enrolled Agents (http://www.naea.org or 800-424-4339), the National Association of Tax Professionals (http://www.natptax.com or 800-558-3402), and the National Society of Accountants (http://www.natptax.com or 703-549-6400). You can also look in the phone book to find the local chapter of any of these organizations.

Ask other family child care providers or the members of your family child care association for the names of their tax professional.

Ask your local child care resource and referral agency, Food Program sponsor, or family child care association for names.

Find out if there are any local taxpayer assistance services for low-income people in your area. Contact your local United Way for more information about these programs.

The IRS Volunteer Income Tax Assistance (VITA) program offers free tax help to low-to moderate-income (under $35,000) taxpayers. Volunteers receive training to help prepare basis tax returns in communities across the country. Not all VITA operations prepare business returns. Be sure to ask right away if the site is equipped to prepare family child care returns.
To find a VITA site close to you, call the IRS at 800-829-1040.

Find out if there are any community resources that you can use. For example, some communities have taxpayer assistance services for low-income people. Contact your local United Way for more information about these programs.

If you use a tax professional, the book Family Child Care Tax Companion can help educate him/her about the unique tax rules affecting providers.

If you do your own taxes, the book Family Child Care Tax Workbook and Organizer can take you step-by-step through all your
tax forms.

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: 801-886-2232 (ex 321)

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Eight Key Federal Tax Issues Unique to Family Child Care Providers

1. The standard for claiming a room in the home as business use is "regular" use, not "exclusive use." Day care children need not be present in a room for it to be used regularly for the business (storage, laundry, etc.).
2. The garage (attached or detached to the home) should be included in the total square feet of the home when calculating the business use of the home. Most family child care providers are using their garage on a regular basis for their business because the garage is used as storage for the car, bicycles, tools, lawn maintenance items, firewood, etc.
3. Providers can claim a higher business use percent of their home if they have one or more rooms used "exclusively" in their business. Providers should add the space percentage of this exclusive use area to the time/space percentage of the rest of the home to calculate the total business use percent of the home.
4. When counting the number of hours the home is used for business, include the number of hours day care children are present as well as the number of hours spent on business activities when the day care children are not present. These hours include time spent cleaning, activity preparation, parent interviews, record keeping, meal preparation, etc.
5. Reimbursements from the Child and Adult Care Food Program are taxable income to the provider. Reimbursements for the provider's own child (assuming the provider is income-eligible) are not taxable income. Providers are entitled to deduct all food served to day care children, even if the food expense is greater than the Food Program reimbursement.
6. Providers who are not licensed or registered under their state law are still entitled to claim business use of their home expenses, if they have applied for or are exempt from mandatory regulations.
7. All providers are better off financially if they claim depreciation on their home as a business expense. When selling their home, providers must always pay capital gains tax on any house depreciation they claim (or are entitled to claim) after May 6, 1997.
8. Most providers can avoid paying capital gains tax on the profit on the sale of their home as long as they live in their home for two years out of the last five years they own 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: 801-886-2232 (ex 321)

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

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"Become a member of the National Associaton 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."

Choosing the Right Tax Professional

It’s extremely important to hire a tax professional who understands the unique tax rules professional can prepare their tax return accurately.

What questions should I ask a tax professional? 

What questions should I ask that are specific to my business?

• Find out if the professional is familiar with:  
• Computation of the business use of home (Form 8829 Business Use of Your Home) and the time-space percentage. Watch out if someone doesn’t ask you for all the hours you worked (including hours after the children are gone).
• The IRS standard meal allowance rate and the reporting of Food Program income. Watch out if someone doesn’t know the current meal rate.
• Depreciation of home, furniture, appliances, and equipment that are used for both business and personal purposes. Watch out if someone says that it’s not worth it to claim depreciation, particularly home depreciation. 

Should I use Tax Preparation Software?

An increasing number of providers use commercial tax preparation software (Turbo Tax, Tax Cut, etc.). These programs can be helpful in calculating depreciation, doing the math, and filling in the many tax forms. They may help you catch mistakes. But they also have drawbacks. Specifically, tax software will not:

Remember, even if you hire a tax professional to do your taxes, you are still responsible for any mistakes on your tax forms, even if the mistake was made by your tax professional. You are also responsible for keeping good records to support the claims on your tax forms.

Because of these and other weaknesses (software programs can contain errors), I do not recommend using tax preparation software unless you are very familiar with all the unique rules affecting family child care providers.

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: 801-886-2232 (ex 321)

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

Blog - http://www.tomcopelandblog.com

"Become a member of the National Associaton 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."

Market Your Tax Services to Family Child Care Providers

In my frequent contact with family child care providers in the past five years, I have observed an increasing number of providers seeking tax preparers rather than doing their own tax returns. Enrolled agents have a growing opportunity to expand their business by reaching out to these taxpayers.

This article suggests ways to identify family child care providers in your area and attract them as new clients. It also looks at the services you can offer to give your business an edge over the competition.

Family Child Care Market

Family child care providers are people who work from their own home caring for children. According to a recent study, 18 percent of all children under the age of six who are enrolled in a child care program are in family child care. Over 200,000 providers are state regulated, with significant variation in the regulation rules from state to state. Probably at least another million providers are caring for children without being regulated, either because they care for only one or two children and aren't required to be regulated, or because they are operating illegally.

Regulated family child care providers are almost exclusively women, usually caring for three to eight children other than their own. They tend to earn relatively little income from their business. According to a forthcoming Final Report of the economics of Family Child Care Study by Kathy Modigliani and others, the average gross income of providers is $21,189. Incomes, however, vary greatly. The average income of the top 20 percent of providers is $39,908. Many providers have a working spouse and thus a larger family income.

Reaching the Providers

Family child care providers tend to be difficult to find. Lists of regulated providers, available from state government offices are usually not useful because they are often out-of-date due to high turnover in the field. In order to effectively identify providers to market your services, Enrolled Agents should work through one of the three networks listed below. Almost every regulated family child care provider is actively connected to one of these three networks.

Child Care Resource and Referral Agencies (CCR&R) help parents find child care programs. They maintain a list (often on computer) of all regulated (and sometimes unregulated) child care programs in their areas. Usually there is one CCR&R in each city. In more rural areas, one agency may cover several counties. CCR&Rs have the most up-to-date list of regulated providers. Sometimes these lists may be purchased for a fee. Many CCR&Rs conduct training workshops, send out newsletters, or send out listings of tax preparers when providers request them.

To find out how to contact your local CCR&R, look in your local phone book under "Day Care" or "Child Care," or call your local county social service office or the national Association of Child Care Resource and Referral Agencies at 202-393-5501 and ask for the name of your local agency.

Child and Adult Care Food Program (CACFP) sponsors reimburse providers for serving nutritious food. The Food Program is run by the U.S. Department of Agriculture. Each state has a number of local CACFP sponsors who serve providers locally. There may be several sponsors in the same area competing with each other because the sponsor gets paid according to how many providers they serve. A provider can only be served by one sponsor. Sponsors visit the homes of each provider on their program several times a year. Sponsors often conduct workshops and publish newsletters. Providers read these newsletters fairly closely because they want to continue receiving the reimbursements. To contact the local sponsors in your area, call your local CCR&R.

There are thousands of Family Child Care Associations across the country. These are usually small groups of providers (50-200) who meet regularly and act as trade organizations to promote the interests of their members. They often hold monthly meetings and publish newsletters. There may be more than one local association in your area. To find the names of these associations, call the National Association for Family Child Care at 800-628-9163.

Contact Checklist

Enrolled Agents should consider approaching all three of these networks in a similar manner:

• Offer to conduct a workshop on tax issues at local meetings or regional state conferences.
• Set up a booth at local family child care conferences.
• Write an article or regular column on tax tips for their newsletters. Run an ad in those newsletters that accept advertising.
• Attend some of the local association meetings to introduce yourself and become recognized.
• Offer to be a local resource on tax matters and answer questions on the phone.
• Provide a discount for your services to members of these networks.

Family child care providers can sometimes be intimidated by tax preparers, particularly if the tax preparer is a man. To overcome this, Enrolled Agents should introduce themselves to as many providers as possible and tell them that they are available to answer questions now and in the future. Establishing a long-term relationship with individuals and these networks is necessary to make providers comfortable with you.

Organizing Provider Records

One of the biggest problems Enrolled Agents have with family child care clients is having to take a lot of time sorting out unorganized records. Some providers may come to a tax preparer with well-organized tax records, but many do not. Here are some suggestions to help correct this problem.

Some tax preparers have developed their own intake form specifically for family child care providers to fill out that helps providers organize their records at tax time. A commercially developed one, "Day Care Income and Expense Worksheet," is available from Sauk Rapid Forms at 612-722-5166.

There are three key record keeping tasks that family child care providers should track throughout the year. They are:

• Tracking the number of hours the home is used for business (particularly hours when the children in care are not present); 
• Saving all food receipts (even personal food receipts); and
• Identifying which purchases for the business are used 100 percent for the business and which are used both for business and personal purposes.

There are several family child care calendar and record-keeping publications on the market that can help providers better organize these and other business records. The sample pages from the Calendar-Keeper 2008 are one example.

Some tax preparers bring all their family child care clients together for a meeting to cover specialized issues as a way to save time. For example, rather than spending a lot of time filling out payroll forms for each client, a tax preparer in Minnesota could hold a meeting of her family child care clients once a year where she teaches them how to fill out payroll forms. The clients fill out the W-2 and W-3 forms at the meeting under the direct supervision of the tax preparer.

Often Enrolled Agents find themselves having to correct a taxpayer's problem that might have been avoided if the taxpayer had contacted the Enrolled Agent sooner. The three areas where this is an issue in family child care are: sale of the home, hiring helpers (family members or non-family members), and going out of business. Many negative tax consequences can be avoided if the client discusses this early on with the Enrolled Agent.

Encourage your clients to contact you as soon as they begin thinking that any of these three events are a possibility. Put notices about this in your own newsletter or emphasize this point when speaking to an audience of family child care providers.

Gaining An Edge

The key to promoting your services to family child care providers is communicating clearly that you understand their business (see The Unique Business of Family Child Care). Stressing your years of tax preparation experience or your affiliation with a large organization is generally not considered meaningful to most providers. If you currently have very few family child care clients, emphasize that you have experience doing other small business tax returns and that you understand the difference between other businesses and family child care.

You may also want to consider ways to offer additional services to potential or current family child care clients. Offering such services can distinguish you from your competition and can attract new business, because they are particularly difficult issues for many family child care providers to handle. Such services could include:

• Set up medical reimbursement plans for providers who hire their spouse or children. Such plans can save a provider's family a significant amount of taxes by claiming medical expenses as a business deduction.
• Set up a system to handle federal and state payroll tax forms for providers. This is an area where many providers do not follow the law because they often receive bad advice. Enrolled Agents should emphasize that they understand the rules for hiring family and non-family members and can help providers take advantage of the tax savings if the proper forms are filled out.
• Help providers understand the importance of setting up family budgets and saving money for retirement. This is a good topic for workshops at provider association meetings. Many providers need assistance with some basic financial planning. Promote the idea of providers establishing their own Simplified Employee Pension (SEP). Show them how they can reduce their current taxes and save for their retirement by using this plan.
• Help providers who are audited. Promote yourself as someone who can assist a provider in an audit. This is a good way to attract attention to yourself and gain a positive reputation in the local family child care community.

Summary

Although family child care providers may not generate significant revenue as individuals for your business, Enrolled Agents who specialize in this area can expect to build up a significant number of new clients. Providers are looking for help, and the news that you are a tax preparer who understands this business will spread quickly by word of mouth.

from the EA Journal, January/February 1997. Posted with permission.

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: 801-886-2232 (ex 321)

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

Blog - http://www.tomcopelandblog.com

"Become a member of the National Associaton 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."