Record Keeping and Taxes

Record keeping may not be your idea of fun, but keeping good business records will save you time and money. For every $100 of business expenses you track, you will save approximately $30-$40 in taxes.

  • General Record Keeping Rules

o    Keeping good records will save you money

o    Review records monthly

o    Save records for at least three years

  • Three Step Process for Claiming Deductions

o    One: Is it deductible?

  • It is if it's “ordinary and necessary “ for your business
  • Must keep “adequate records “ to support deduction

o    Two: How much is deductible?

  • 100% Business
  • Shared (business and personal): use Time-Space Percentage

o    Three: When can I deduct it?

  • Less than $2500: one year
  • More than $2500: depreciate
  • Section 179 rule exception
  • Three Key Record Keeping Tips

o    Save receipts for all expenses associated with your house

o    Keep records of all meals and snacks served (including non-reimbursed meals and snacks)

o    Track all the hours you work in your home

Business Income

You will owe taxes on all income you receive for your business: money from parent fees, government subsidies for low income parents, Food Program reimbursements, and grants to purchase equipment. At the end of the year get a receipt signed by the parents indicating how much they paid you. This will avoid later disputes with parents or the IRS about how much money you earned.

Business Expenses

You are entitled to deduct all expenses that are “ordinary and necessary” for your business. This includes hundreds and hundreds of items around your home, including:

House Expenses
: property tax, mortgage interest, utilities, cable TV, house insurance, house repairs, house depreciation, fence, landscaping, well, garage, rent (for renters) etc.

Items for the Children
: food, arts and craft supplies, toys, outdoor play equipment, children’s books and magazines, video rentals, CDs, diapers, field trip expenses, etc.

Household Items
: light bulbs, toilet paper, paper towels, cleaning supplies, carpet cleaning, lawn maintenance service, kitchen supplies, fire extinguisher, household tools, yard supplies, lawn mower, laundry detergent, etc.

Furniture and Appliances
: sofa, chairs, beds, TV, VCR, washer, dryer, tables, rugs, freezer, refrigerator, microwave, rocker, stroller, etc.

Other Expenses
: advertising, car expenses (including car loan interest), business liability insurance, family child care association dues, training workshops, computer, printer, etc.

You can deduct 100% of such items used exclusively for your business and a portion of items used by your business and your family. Items costing more than $2500 may have to be deducted over a number of years using depreciation rules.

The three most important things to do throughout the year to keep good expense records:

  • Save all receipts for all expenses associated with your home or apartment.
  • Save all food receipts (including personal food) and track the number of all meals served (even if not reimbursed by the Food Program).
  • Track all hours your home is used for business, particularly when child care children are not present (cleaning, activity preparation, phone calls, etc).

Other Tips

  • Startup Expenses: You can begin deducting expenses as soon as your business begins. This is based on when you are ready to care for children and are advertising that you are ready. This may be before you are officially regulated.
  • Keep track of your car mileage for trips you take in which the primary purpose of your trip is business: grocery store, bank, park, school, library, etc.
  • The IRS doesn’t want to wait until the end of the year to get your taxes. You may have to pay federal or state estimated taxes each quarter. If you are married your spouse can have more withheld to cover the taxes on your income. Otherwise, you may have to file a quarterly estimated tax Form 1040ES which is due April 15, June 15, September 15, and January 15.
  • If you hire a substitute or helper in your business you should treat this person as an employee and withhold federal and state payroll taxes. It is rare for a provider to have an independent contractor.
  • You are entitled to claim depreciation deductions for all the household furniture and appliances you owned before you went into business that you are now using in your business. Conduct a room-by-room inventory of your property.
  • Keep up with your record keeping by reviewing your records at least monthly, if not weekly. Use envelopes to store receipts by the different expense categories. Keep cancelled checks, credit card statements, calendar notations, photographs, and other written records to document your expenses.
  • Keep your records for at least three years after filing your taxes. You can amend your tax return and the IRS can audit you back three years.

Child and Adult Care Food Program

You are always financially better off by joining the Food Program. Reimbursements for your child care children are taxable income, but are not for your own children. After paying taxes on the reimbursements you will have at least half of the money left over. Business food expenses are deductible whether or not you are on the Food Program.

Photo Credit: Bjorn Bulthuis

Return to Taxes