nafcc.org -
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Exclusive Use Rooms and |
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Exclusive use means a room is not used for personal use
Family child care providers who use one or more rooms in their home exclusively for their business should use this formula:
Space Percent of + Time/Space Percentage = Time/Space Percentage exclusive use rooms of rest of home of entire home |
Let’s use an example of a home with 2,000 square feet: one room of 100 square feet used 100% for business and the remaining 1,900 square feet used regularly for business use and personal use. The Time percent is 40%.
Step One: Divide the square feet of the exclusive use space by the total square feet.
200 = 10% Space for exclusive use space
2,000
Step Two: Divide the square feet of the space used for regular business use by the total square feet.
1,800 = 90% Space for rest of home
2,000
Step Three: Multiply the percent from Step Two by the Time percent.
90% x 40% = 36% Time-Space Percentage for rest of home
Step Four: Add the percent from Step One with the percent from Step Three.
10% + 36% = 46% Time-Space Percentage for entire home
Notice that without this formula for an exclusive use room the Time-Space percentage would have been only 40% (40% Time x 100% Space). See instructions to Form 8829 Expenses for Business Use of Your Home or the latest Family Child Care Tax Workbook and Organizer .
This handout was produced by Think Small (www.thinksmall.org).
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Rev. Proc. 2003-22 |
SECTION 1. PURPOSE
This revenue procedure provides taxpayers engaged in the trade or business of providing family day care with optional standard meal and snack rates to use in computing the deductible cost of food provided to eligible children receiving care from family day care providers.
SECTION 2. BACKGROUND
.01 Section 162(a) of the Internal Revenue Code allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Under this section, family day care providers may deduct the cost of food provided to eligible children in the family day care. For family day care providers who receive reimbursements from a sponsor under the Child and Adult Care Food Program (CACFP) of the Department of Agriculture, only the portion of the cost of food, if any, that exceeds the reimbursements is deductible. Under § 262, however, no portion of the cost of food provided to the family day care provider’s family, including food consumed by the provider or the provider’s own children, is deductible.
.02 Section 6001 provides that every person liable for federal income tax shall keep such records and comply with such rules as the Commissioner of Internal Revenue prescribes. Section 1.6001-1(a) of the Income Tax Regulations provides that every person must keep records to substantiate the amount of any deduction.
.03 Section 7602(a) provides that the Commissioner may examine any books, papers, records, or other data that may be relevant to ascertaining the correctness of any return, making a return where none has been made, or determining the liability of any person for any internal revenue tax.
.04 Under §§ 162 and 6001, family day care providers must keep records that substantiate deductions for food provided to eligible children in the family day care. Because family day care providers often purchase food that is used for their own families as well as in carrying on their family day care business, they may have difficulty substantiating the portion of the cost of food that is attributable to their family day care business.
Additionally, it is burdensome for family day care providers to keep receipts for all food purchased during the taxable year for both the family day care and their own family’s personal use. To minimize disputes concerning the records family day care providers must keep to substantiate their deductible food cost, and to reduce burden by eliminating the need to keep all receipts for food purchased during the taxable year, the Internal Revenue Service will permit family day care providers to use the standard meal and snack rates provided in this revenue procedure to compute the deductible cost of food in lieu of using actual costs. A family day care provider who complies with all the provisions of this revenue procedure will be deemed to meet the substantiation requirements of § 6001 and the regulations there under for the purpose of computing the deductible cost of food provided to eligible children in the family day care.
SECTION 3. SCOPE
This revenue procedure applies to any family day care provider, whether or not licensed, registered, or otherwise regulated by the state or locality in which the family day care operates, who chooses to use the standard meal and snack rates provided in this revenue procedure to substantiate the deductible cost of meals and snacks provided to eligible children in the family day care.
SECTION 4. DEFINITIONS
.01 Family Day Care Provider. A family day care provider is a taxpayer engaged in the trade or business of providing family day care.
.02 Family Day Care. Family day care is child care provided to eligible children in the home of the family day care provider that is (1) non-medical, (2) does not involve a transfer of legal custody, and (3) generally lasts for less than 24 hours each day.
.03 Eligible Children. Except as otherwise provided in this section, eligible children are unemancipated minors receiving family day care in the home of the family day care provider. Eligible children do not include children who are full-time or part-time residents in the home in which the child care is provided or children whose parent(s) or guardian(s) are residents of the same home. For example, a family day care provider’s own children, and any children who live in the family day care provider’s home on a full or part-time basis, are not eligible children even if they receive day care services from the family day care provider. Eligible children do not include children who receive day care services for personal reasons of the family day care provider. For example, if a family day care provider provides day care services for the provider’s sister’s child as a favor to the sister, that child is not an eligible child within the meaning of this revenue procedure.
SECTION 5. APPLICATION
.01 In General. Family day care providers may compute the deductible cost of each meal and snack actually purchased and served to an eligible child during the time period when family day care is provided by using the standard meal and snack rates provided in section 5.04 of this revenue procedure. A family day care provider may use the standard meal and snack rates for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day. The rates 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. 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.
.02 Rates Must Be Used Consistently. Family day care providers may use either the standard meal and snack rates or actual costs to calculate the deductible cost of food provided to eligible children in the family day care in any particular taxable year. Family day care providers who choose to use the standard meal and snack rates provided in this revenue procedure for a particular taxable year must use the rates for all their deductible food costs during that taxable year. However, a family day care provider who uses the standard meal and snack rates in any taxable year may use actual costs to compute the deductible cost of food in any other taxable year.
.03 Record Keeping. To satisfy the record keeping requirements of § 6001 and the regulations thereunder, family day care providers who use the standard meal and snack rates provided in this revenue procedure must maintain records to substantiate their computation of the total amount deductible under this revenue procedure for each taxable year. The records should include the name of each eligible child, dates and hours of attendance in the family day care, and the type and quantity of meals and snacks served.
This information may be recorded in the meal and snack log contained in the APPENDIX to this revenue procedure. A family day care provider who uses the log in the APPENDIX to maintain accurate and required information will be deemed to comply with the record keeping requirements of § 6001 and the regulations thereunder.
.04 Standard Meal and Snack Rates. The standard meal and snack rates are equal to the Tier I reimbursement rates of the CACFP for meals served in day care homes. For purposes of this revenue procedure, the standard meal and snack rates for a taxable year are the Tier I rates in effect on December 31 preceding the beginning of the family day care provider’s taxable year. For example, for the 2003 taxable year, calendar year family day care providers will use the Tier I rates in effect on December 31, 2002, as the standard meal and snack rates to calculate their deductible food costs for the entire 2003 taxable year. The rates will be adjusted annually (see section 5.06 of this revenue procedure).
The standard meal and snack rates in effect on December 31, 2002 are:
(1) For all family day care providers other than those located in Alaska or Hawaii:
Breakfast $0.98
Lunch/Dinner $1.80
Snack $0.53
(2) For family day care providers located in Alaska:
Breakfast $1.55
Lunch/Dinner $2.93
Snack $0.87
(3) For family day care providers located in Hawaii:
Breakfast $1.13
Lunch/Dinner $2.11
Snack $0.63
What is Included in the Standard Meal and Snack Rates. The standard meal rates apply to breakfast, lunch, and dinner. The standard meal and snack rates include beverages, but do not include non-food supplies used for food preparation, service, or storage, such as containers, paper products or utensils. The standard meal and snack rates do not include other non-food items such as medication, administrative supplies, or toys. A family day care provider who uses the standard meal and snack rates may separately deduct the cost of these non-food items if the cost is deductible under § 162.
.06 Annual Adjustment of the Standard Meal and Snack Rates. The standard meal and snack rates will be adjusted annually. The Department of Agriculture adjusts the Tier I reimbursement rates each July based on changes to the consumer price index for the cost of food at home. Although the Tier I reimbursement rates apply for the period of July 1 to June 30 of each year, for purposes of this revenue procedure the standard meal and snack rates applicable for a particular taxable year are the Tier I rates in effect on December 31 preceding the beginning of the family day care provider’s taxable year.
Generally, the CACFP reimbursement rates may be found on the Internet at http://www.usda.gov under “Child and Adult Care Food Program.” The Service will post the standard meal and snack rates currently in effect under this revenue procedure on the Internet at http://www.irs.gov/businesses/small/industries/index.html , then click on “Child Care.”
The Service will also include the standard meal and snack rates that are current at the time of publication in Publication 587, Business Use of Your Home.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for taxable years beginning after December 31, 2002.
SECTION 7. AUDIT PROTECTION
If a family day care provider uses the Tier I rates to compute the deductible cost of food provided to eligible children in a taxable year that ends before January 1, 2003, the Service will not raise the issue of the amount of the family day care provider’s deductible food costs. If a family day care provider uses the Tier I rates to compute the deductible cost of food provided to eligible children in a taxable year that ends before January 1, 2003, and the amount of the family day care provider’s deductible food costs is an issue under consideration (within the meaning of section 3.09 of Rev. Proc. 2002-9) in examination, in appeals, or before the U.S. Tax Court in a taxable year that ends before January 1, 2003, that issue will not be further pursued by the Service.
DRAFTING INFORMATION
The principal author of this revenue procedure is Angella Warren of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. Warren at (202) 622-4950 (not a toll free call).
APPENDIX
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Family Child Care Provider Meal and Snack Log |
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| Name of Provider ____________________________ | TIN/SSN _________________________ | |||||||
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Week of _______________________________ |
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Child's Name: |
Monday |
Tuesday |
Wednesday |
Thursday |
Friday |
Saturday |
Sunday |
TOTALS |
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Hours of Attendance: _________ |
Hours of Attendance: _________ |
Hours of Attendance: _________ |
Hours of Attendance: _________ |
Hours of Attendance: _________ |
Hours of Attendance: _________ |
Hours of Attendance: _________ |
||
|
Bkfst 9 |
Bkfst 9 |
Bkfst 9 |
Bkfst 9 |
Bkfst 9 |
Bkfst 9 |
Bkfst 9 |
Number of Breakfasts |
|
|
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Number of Snacks |
|
|
Lunch 9 |
Lunch 9 |
Lunch 9 |
Lunch 9 |
Lunch 9 |
Lunch 9 |
Lunch 9 |
Number of Lunches Served______ |
|
|
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Number of Snacks |
|
|
Dinner 9 |
Dinner 9 |
Dinner 9 |
Dinner 9 |
Dinner 9 |
Dinner 9 |
Dinner 9 |
Number of Dinners |
|
|
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Snack 9 |
Number of Snacks |
|
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Number of breakfasts served:
Number of lunches served:
Number of dinners served:
Number of snacks served:
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Number of breakfasts served:
Number of lunches served:
Number of dinners served:
Number of snacks served:
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Number of breakfasts served:
Number of lunches served:
Number of dinners served:
Number of snacks served:
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Number of breakfasts served:
Number of lunches served:
Number of dinners served:
Number of snacks served:
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Number of breakfasts served:
Number of lunches served:
Number of dinners served:
Number of snacks served:
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Number of breakfasts served:
Number of lunches served:
Number of dinners served:
Number of snacks served:
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Bkfst 9
Snack 9
Lunch 9
Snack 9
Dinner 9
Snack 9
Hours of attendance:
Number of breakfasts served:
Number of lunches served:
Number of dinners served:
Number of snacks served:
Hours of attendance:
Weekly Totals: Breakfast Lunch Dinner Snacks
Family Day Care Provider Meal and Snack Log
Name of Provider TIN/SSN
Taxable Year Ending
Total number of breakfasts served during the year x breakfast rate of $ = $ (annual breakfast cost)
Total number of lunches served during the year x lunch rate of $ = $ (annual lunch cost)
Total number of dinners served during the year x dinner rate of $ = $ (annual dinner cost)
Total number of snacks served during the year x snack rate of $ = $ (annual snack cost)
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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New IRS Audit Techniques Guide on Family Child Care Clarifies the Time-Space Percentage |
by Tom Copeland, Consultant to NAFCC
The IRS has recently released a new version of its Child Care Audit Techniques Guide that is designed to assist IRS auditors who audit family child care providers. It replaces an earlier version that was published in 2000 and went out of print last year. (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Child-Care-Provider-Audit-Technique-Guide).
The new Guide is very helpful in clarifying a number of tax rules that will make it easier for providers to fill out their tax return and helpful in reducing conflicts during audits. Any providers who is audited should read this Guide very carefully.
One of the most important tax rules that affect family child care is the Time-Space Percentage. This is a formula that is used to calculate how much of house expenses used for both business and personal purposes are deductible as a business expense. Such house expenses include utilities, property tax, mortgage interest, house insurance, house repairs, and house depreciation. These expenses are claimed on Form 8829 Expenses for Business Use of Your Home. Because these expenses can total thousands of dollars, it is important for providers to properly calculate this percentage. The Time-Space Percentage consists of two elements: the space percentage and the time percentage. These two elements are multiplied by each other in Part I of Form 8829.
Here are some of the clarifications made to the latest version of the Guide in dealing with the Tim-Space Percentage:
- The Guide clarifies that a provider can use her Time-Space Percentage for her house expenses if she is licensed, has applied for a license or is exempt from having a license. An unlicensed provider (even an illegal provider) can still claim other business expenses such as food, toys, supplies, etc. on Schedule C.
- Providers often put children in separate bedrooms to take naps so that they can sleep better, and as a result will claim multiple bedrooms as regular use in calculating her space percentage. The Guide says that this is acceptable even when a provider could put all the children in one bedroom. In other words, there is no IRS requirement that providers must use the fewest number of rooms possible.
- The Guide says that providers should count the basement and garage areas as part of the total square feet of the home. This is the first time the IRS has so clearly stated this position. Over the years I have repeatedly won IRS audits after urging providers to claim these areas as regular use in their Time-Space Percentage calculation. Since most providers use these spaces regularly for their business, this new clarification will help increase their Time-Space Percentage. For those providers, however, who do not use these spaces on a regular basis for their business, this clarification will probably cause their Time-Space Percentage to decrease. Regular use of a basement or garage means that the area is used two-three times per week for business activities. Such basement activities could be: furnace/water heater area, storage area for food, toys, other household items, workbench where household tools are kept, laundry room area, etc. Such garage activities could be: storage of tools, household items, garbage cans, car, bicycles, yard furniture, and so on. The Guide is not clear on whether a provider should count an unfinished basement as part of the total square feet of the home.
- In calculating their Time Percentage providers are allowed to count hours spent on business activities in their home when day care children are not present. This includes hours spent on cleaning, cooking, activity preparation, and record keeping. The old version of the Guide cited an IRS Revenue Ruling (92-3) in which the court allowed a provider to claim a half hour each morning and evening on these activities. Since this Ruling was released some auditors have concluded that providers cannot claim more than hour a day on these activities. The new Guide clarifies this by saying that the Revenue Ruling is “not an absolute rule” and therefore providers can claim more hours on such activities.
- The Guide also clarifies that providers should use their Time-Space Percentage on other shared expenses such as office supplies, cleaning supplies, educational and art supplies, and toys that are claimed on Schedule C.
Over the years I have advocated for changes with the IRS that have helped clarify tax rules to make it easier for providers to fill out their tax return. I offered several suggestions to the IRS when they drafted the first version of this Guide. In preparation for revising this Guide the IRS again asked me to offer suggestions for how it could be improved. All of the changes cited above are based on my suggestions and the Guide includes a number of other changes suggested by me.
My work with the IRS is made possible by my partnership with NAFCC. If you are audited by the IRS (or your state) please contact me for free assistance. It’s one of the benefits of membership in NAFCC.
If you wish to contact me about an audit or any business question, call me at 800-359-3817 (ex 321) or email at
This email address is being protected from spambots. You need JavaScript enabled to view it.
.
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."
|
IRS Revenue Ruling 92-3 |
January 21, 1992
Part 1. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 262.-Personal, Living, and Family Expenses
If a taxpayer provides day care in the taxpayer's home, are the costs of basic local telephone service for the first telephone line provided to the home and other substantiated telephone charges deductible under section 262(b) of the Code. See Rev. Rul. 92-3, below.
Section 280A - Disallowance of Certain Expenses in Connection with Business Use of a Home, Rental of Vacation Homes, etc.(Also Section 262.) Calculation of the deduction for the business use of a home by day care providers. A day care provider should compute the amount of the deduction by treating a room as used for day care for the entire business day if it is available for day care use for the entire day and is regularly used for day care.
Issue
How should a day care provider compute the amount of the deduction provided under section 280A of the Internal Revenue Code for the business use of the provider's home for day care during a taxable year?
Facts
A, an individual, operates a full-time day care facility in A's home in state M. A is a licensed day care provider under the laws of M. A's day care business is regularly operated 11 hours each day (from 7 a.m. to 6 p.m.), 5 days a week, 250 days a year. During these business hours, A provides day care for several young children other thank A's children. Some children arrive at K's home for day care at 7 a.m., and some do not leave As home until 6 p.m. At any particular time during K's business day, A has at least 1 child (other than A's children) in A's home for day care.
The total floor area of A's home is 1,600 square feet. Although no rooms in A's home are used exclusively for A's day care business, several rooms in A's home are available for day care use throughout the business day and are regularly so used as part of A's routine provision of day care. The total floor area of these rooms is 1,200 square feet. In addition, A spends one-half hour before and one-half hour after regular business hours preparing for and cleaning up after the children.
In addition to interest and taxes of $5,000, A, a calendar year taxpayer, incurred $4,000 of costs during 1991 for electricity, gas, water, trash collection, general maintenance, and insurance with respect to the use of A's home for day care and as a personal residence. The total depreciation for A's home during 1991 (determined under sections 167 and 168 as though the entire home were depreciable) was $1,000. Thus, A's total costs for 1991 were $10,000. A's home has only one telephone line and A pays a monthly charge of $20 for basic local telephone service. The laws of M require A to have a telephone in order to be licensed by M to provide day care. A uses the telephone for both business and personal calls.
A has adequate records to substantiate the $10,000 of costs, the number of hours and days that A's day care business was operated (including preparation and clean-up time), the number of children for whom A provided day care, and A's telephone costss.
Law and Analysis
Section 28OA(a) of the Code provides generally that in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable shall be allowed with respect to the use of a dwelling unit that is used by the taxpayer during the taxable year as a residence.
Under section 28OA(b), subsection (a) shall not apply to any deduction otherwise allowable to the taxpayer without regard to the deductions connection with the trade or business (for example, the deduction for qualified residence interest under section 163 and the deduction for state and local real property taxes on a personal residence under section 164). Section 280A (c) (4) (A) of the Code provides, in part, that subsection (a) shall not apply to any item to the extent that the item is allocable to the use of any portion of the dwelling unit on a regular basis in the taxpayer's trade or business of providing day care.
Section 28OA(c) (4) (B) of the Code provides, in part, that paragraph (a) shall apply only if the owner or operator of the trade or business has applied for, has been granted, or is exempt from having a license, certification, registration, or approval as a day care center or as a family or group-day care home under the provisions of any applicable state law.
Section 28OA(c) (4) (C) of the Code provides, in part, that if a portion of the taxpayer's dwelling used in the day care business is not used exclusively for day care purposes, the amount of expenses attributable to that portion shall not exceed an amount that bears the same ratio to the total amount of the items allocable to such portion as the number of hours that portion is used for such purposes bears to the number of hours the portion is available for use.
Section 28OA(c) (5) of the Code, in part, limits the section 28OA(c) (4) deduction for day care expenses to the excess of the gross income derived from the day care business over the otherwise allowable deductions allocable to the day care business (e.g., interest and taxes) and the deductions allocable to that business that are now allocable to the use of the dwelling (e.g., food and supplies). Section 262(b) of the Code provides that, in the case of an individual, any charge for basic local telephone service with respect to the first telephone line provided to any residence of the taxpayer shall be treated as a nondeductible personal expense.
In computing the deduction for a taxable year under section 280A (c) (4) of the Code for the business use of A's home to provide day care, A should multiply the total costs incurred during the year with respect to A's home ($10,000) by two fractions. (If A rented rather than owned A's home, the amount of rent paid in 1991, rather than the depreciation, mortgage interest, and real estate taxes would be included in the costs incurred.) The first fraction is the total square footage in A's home that is available for day care used throughout each business day and that is regularly so used in that business, divided by the total square footage of A's home. The second fraction is the total hours in the year that the day care business is operated (including substantiated preparation and clean-up time), divided by the total number of hours in a year (8,760 hours). If a room is available for day care use throughout each business day and is regularly used as part of A's routine provision of day care (including a bathroom, an eating area for meals, or a bedroom used for naps), the square footage of that room will be considered as used for day care throughout each business day. A day care provider is not required to keep records of the specific hours of usage of such a room during business hours. Also, the occasional nonuse of such a room for a business day will not disqualify the room from being considered regularly used. However, the occasional use of a room that is ordinarily not available as part of the routine provision of day care (e.g., a bedroom ordinarily restricted from care use but used occasionally for naps) will not be considered as used for day care throughout each business day.
Thus, except as limited by section 28OA(c) (5) of the Code, A's may deduct under section 28OA(c)(4) $2,568.49, which represents the portion of the $10,000 in expenses attributable to A's use of 1,200 square feet of A's home for day care for 3,000 hours (12 hours per day for 250 days) during 1991. The computation of the $2,568.49 day care deduction is as follows: (1200/1600) x (3000/8760) x $10,000 = $2,568.49. The non-business portion of the otherwise deductible interest and taxes may be claimed as an itemized deduction.
Under section 262 (b) of the Code, A's $20 monthly expense for basic local telephone service is a nondeductible personal expense, even though the state requires A to have a telephone in order to be a licensed day care provider. Additional telephone charges incurred for business purposes are deductible under section 162 to the extent substantiated.
Holding
A day care provider should compute the amount of the deduction for a taxable year provided under section 280A of the Code for the business use of a home for day care by multiplying the total costs incurred during the year that are allocable to the use of the home by two fractions. The first fraction is the total square footage in the home that is available for day care use throughout each business day and that is regularly so used in that business, divided by the total square footage of the home. The second fraction is the total hours in the year that the day care business is operated (including substantiated preparation and clean-up time), divided by the total number of hours in a year. This deduction is limited as provided in section 280A (c) (5).In addition, pursuant to section 262(b), no deduction is allowed for the cost of basic local telephone service for the first telephone line provided to the home.
Drafting Information
The principal author of this revenue ruling is Cynthia A. Davis of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Davis (202-566-4177).
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Phyllis Rosales - Provider Saves Thousands of Dollars in IRS Audit |
by Tom Copeland
When family child care provider Phyllis Rosales of Kansas City, Missouri, was told by an auditor of the IRS over three years ago that she owed over $14,000 in taxes and penalties, she decided to fight back and call Tom Copeland for help. Last month Tom settled her case with the IRS and saved Phyllis over $8,000. The original auditor clearly did not understand basic family child care tax rules. She told Phyllis that she couldn't deduct something if it had any personal use and denied deductions for cable television, house repairs, furniture and appliances, cell phone, Internet use, business interest on a credit card, and much more.
She also asserted that Phyllis had a Time-Space Percentage of 22% rather than the 46% claimed by the provider. She denied the business space use of the garage, the provider's bedroom and her daughter's bedroom as well as part of the basement. She also denied many business hours the provider worked after the day care children were gone. In addition, the auditor charged Phyllis over $2,400 in accuracy related penalties for "intentionally" disregarding rules and regulations. (The Tax Court lawyer threw out these penalties.) The provider made some mistakes on her tax return. She claimed 100% of the cost of household items such as a CD player, camera, dishwasher, computer, furnace cleaning, dryer repair, and garage door repair.
In the settlement, the IRS agreed that she was entitled to deduct her Time-Space Percentage of these expenses. Phyllis also deducted expenses related to her cat (food, litter, and vaccinations) that should not have been claimed. (In assisting providers over the past 20 years, I have never won a deduction for a dog or cat!) Here are some lessons that providers can take from this case:
Providers are entitled to claim their basement and garage as part of their Time-Space Percentage if they can show that these areas are used on a regularly basis in their business.
Phyllis worked an average of 16 hours a week after the day care children were gone doing activities such as cleaning, record keeping, activity preparation, etc. Although 16 hours is higher than most providers, Phyllis won because she kept a daily record of these hours on her calendar for each month of the year.
Most providers do not keep such complete and accurate records of the hours they work when children are not present. In my workshops and books I recommend that providers keep at least two months of such records. I still think this is a reasonable goal. But in this case where the provider worked such long hours, recording her hours for the entire year, made a difference.
In addition to the extra 16 hours a week, Phyllis also claimed another 297 hours spent studying at home to receive her Early Childhood Degree. Her degree was not deductible because it was her first post secondary degree. (Note: If providers already have a post-secondary degree and get a second degree, the cost of the second degree is deductible.) The IRS took the position that since the degree was not deductible, the hours spent studying at home could not be counted. I have not faced this issue before and we agreed not to count these hours. In the end the IRS allowed Phyllis to claim a Time-Space Percentage of 42.7%.
Phyllis had hired her 17-year old daughter and husband in her business and established a medical reimbursement plan that allowed her to deduct medical expenses for her business. She kept excellent payroll records. The auditor believed that providers could not establish such plans even though the Tax Code clearly allows it. Because of the recent Tax Court case (see the Speltz case) won by Tom, the Tax Court lawyer quickly allowed the deduction (over $2,400) in this case. Providers who intend to set up a medical reimbursement plan and hire their family members should seek professional tax advice before doing so to make sure they follow all the proper rules.
Many providers deduct 100% of items that can also be used by their family (furniture, supplies, toys, etc.). If you are doing this, you need to be able to prove that your family never uses such items. This is relatively easy for things such as children's furniture, but can be much more difficult for items such as a rocking chair or CD player. A safer position to take would be to only claim a business deduction of 90% so as to appear more reasonable even though the items may actually be used 100% by the business.
Persistence pays off. I talked with Phyllis numerous times over the phone and urged her to keep fighting because I believed the IRS positions were not supported by the Tax Code. She did everything she could: responded to all requests for information from the IRS, wrote letters, sent copies of Tax Court cases, and talked to the supervisor of the hearing officer when the officer would not look at her records. She then took the next step and appealed her case to Tax Court. She gave me all the records I needed to represent her and after three years she won a significant victory. After her victory, Phyllis wrote to us:
"Tom if it wasn't for you I would not have been able to fight my fight. I would have had to let the powerful IRS win, even though I knew they were wrong on many issues. I would not have had the resources that you offered me. For me it was not just the money, my integrity was in question and my savvy as a business owner. I have always prided myself with being an honest person and doing the right thing. If it wasn't for you and your dedication to my cause, I'm afraid I would have given up and not have the satisfaction that I feel knowing that I was just and you helped me prove that. What a boost for my self-confidence!"
This is the fifth Tax Court case involving a family child care provider that I have handled. In all cases the provider saved a substantial amount on her taxes.
This handout was produced by Think Small (www.thinksmall.org).
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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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