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Depreciation Schedules
What they are and why you need them
I want to give you an important tip:
Be sure you get all the depreciation schedules with your tax return.
If you prepare your own tax return, print and save them. If you have your tax return professionally prepared, be sure the preparer prints this information with your copy of the tax return. Many do not.
I recommend that you ask about depreciation schedules before you agree to work with a particular tax preparer. Find out if all the schedules (both for regular tax and Alternative Minimum Tax purposes--more on this later) will be included with your copy of the tax return. If not, find someone else to work with.
This is a strong suggestion, but having the depreciation schedules in your possession is very important and certain tax professionals consider them to be privileged work papers which they don't have to provide. Many others just don't print them out of habit or because they know it will be hard for you to switch preparers without them. Either way, you lose.
"Depreciation" is a big word that intimidates many taxpayers, but it's really a simple concept. Read on for further explanation.
The bad news:
When you sell your home, you will be taxed on the amount of your "allowed or allowable" home depreciation. This is called depreciation recapture. Even if you never deducted home depreciation on your tax return, you still have to pay the depreciation recapture tax when you sell.
Some taxpayers try to avoid the recapture tax by leaving depreciation off of their tax return and some tax preparers encourage this. Don't listen to them! You might as well get a tax benefit for the depreciation now, since you will have to pay the recapture tax later, regardless.
It makes no difference whether you sell your home while you are still in business or after your business has been closed for a long time. You will still owe the depreciation recapture tax.
The good news:
You will save more tax by deducting home depreciation on your tax return every year than you will eventually have to pay back at the time of sale. Also, current law lets you treat your home sale as a personal, non-business transaction. This means that your sale should be mostly nontaxable, except for the depreciation recapture. You must have lived in the home for 2 out of the last 5 years at the time of the sale.
Prior to 2001, many daycare providers shut down their businesses before selling to avoid having a taxable capital gain based on the business use of their home. This is no longer necessary.
If you have neglected to deduct depreciation for a number of years, you can use
IRS Form 3115 to deduct the total missed depreciation all in one year.
Remember:
If you own your home, be sure to deduct home depreciation. You always come out ahead that way. Avoid tax preparers who advise otherwise.
The Time/Space Percentage May Not Be Right for Every Home Deduction
Other percentages are allowed
How does a child care provider deduct utilities? Children use lots of water outside (water tables, water fights, etc) a good 6 months out of the year, how does that factor in if the formula for utilities is only based off of the actual space used in the house? Remember, yard space is not calculated in the time/space formula. Even if it is used during business hours by the children.
You are not required to use your time/space percentage for all of your shared expenses, if that percentage does not accurately reflect actual business use. I have another client who says that a much greater percentage of her total water usage goes to child care activities than would be allowed with the time/space percentage. She came up with another percentage and you can do that, too, but you must have some documentation to back it up.
You could count child care heads versus your family head count during the day to determine the amount of water used for hand washing and toilet flushes. (You can also count employee water usage, but not your own, even during business hours.) You could count your water play days and estimate the amount of water used each day. These are just ideas that come to mind. I'm sure you can think of more.
Since you just started your child care, you might be able to compare water usage on your bills with water usage from before you started the business. Document the increase in the amount of water used (either each month or over an entire year) and figure out what percentage of your total water usage that represents.
Regarding your side note: Tom Copeland's Record-Keeping Guide is my "Bible" when it comes to family child care tax preparation. He has been an expert in the field for going on thirty years. That's the place for any provider or tax professional to confirm the correct way to do things.
Why Can't Child Care Providers Use Outside Space Measurements? The space percentage counts inside space only
Why don?t I ask for the outside information? It seems logical to claim it, right? Many of my clients have a large backyard with nice play structures, sandboxes, water tables, patio area, etc., and the children use that outside space just as much as the indoor space. It seems such waste to not ask to claim that space for child care . . .
This is a fairly common misunderstanding. The space measurements are used to calculate your time/space percentage. This percentage determines how much of your home expenses, such as rent or mortgage interest, utilities, building depreciation, etc., you can deduct as a business expense. It is meant to indicate the percentage of your home that is used for business purposes and that means the structure only. Yard space does not affect your time/space percentage.
It is quite true that many providers have large yards and many are outside with children a great deal. Unfortunately, though this is the case, the size of your yard does not affect your time/space percentage and does not need to be measured. A deck that is part of the structure of a home can be measured and counted as part of the home square footage, but you can't count yard or patio space.
I have seen family child care tax returns with all manner of errors over the years, but I actually have never seen anyone count the yard space as part of their square footage. (Though I am sure there are those who have done it.) Square footage means the building only.
Hopefully this will make sense to you. Time spent in the yard will certainly factor into your total hours worked and affect your time/space percentage that way.
Finally, I always refer to Tom Copeland's Family Child Care Record-Keeping Guide for guidance. In Chapter Three, he writes: "Don't include your lawn, driveway, sidewalk, outdoor play areas, garden, or patio"....as part of your home space.
Gifts for Volunteer Helpers?
Be careful . . .
This is a potentially thorny issue. The trouble with giving these volunteer helpers gifts, is that it could be interpreted as wages. This is because they are doing employee work for free and when employers give gifts to employees (cash or otherwise), it is considered taxable compensation.
I would keep any gifts very trivial to, hopefully, avoid this issue. As far as deducting the cost of such gifts, the IRS limits gift deductions to a value of $25 per person per year maximum. If you stick to $25 or less, you should be okay on all counts.
As far as where to report the deduction on your Schedule C, it really doesn't matter too much. You could put it separately on your Schedule C as "gift expense." Sometimes I lump things like this under supplies or office expense.
Are You a Household Employer?
First a caveat: I work with family child care providers and this article concerns parents hiring babysitters in their homes. Such folks are "household employers." Day care providers are NOT household employers. Though they work out of their homes, they are business owners and are categorized as "commercial employers."
Let's say you have a college girl come over to your house and she watches your son for about 3 hours a day. However she is not in school right now and doesn't have any other job. You paid her a total of $3,800. Should you file a 1099, or do you make a W-2 for her? File a W-2. You are a household employer. At least that's somewhat easier than being a regular employer. You can file a form with your regular income tax return to pay the federal payroll taxes.
Meal Rates Also Apply to Restaurant Meals
Count heads when you take the kids out to eat
Not many child care providers (nor many tax preparers) seem to know that when using meal rates to calculate your food deduction for income tax purposes, your choice will affect restaurant meals, as well as meals served at home.
Count the heads of daycare children when taking them out to eat, if you are using the meal rate method. If you are using the standard meal allowance rates to calculate your income tax deduction for meals served at home, then you must also use the meal rates for the day care child's meals eaten at restaurants. (This has nothing to do with food program meal counts or reimbursements. This rule only affects your income tax return food deduction.) If you want to deduct the actual cost of each child's restaurant meals, then you must deduct the actual cost of groceries for at-home meals. Your choice can change from year to year, but for any given year, you must use either the meal rate method or the actual grocery cost method for both meals served at home and those eaten in restaurants.
This rule applies to meals for children in your care. If you have an employee with you at a restaurant outing with the daycare children, you can deduct the actual cost of the employee's meal. You have no choice here, in fact, because meal rates cannot be used for a helper's meal. Whenever you supply a meal to an employee during work hours (at home or away from home), you can take a full deduction based on the actual meal cost. (If you take your employee out to dinner after hours for employee morale or to talk business, you can also take a deduction, but only for 50% of the cost. This is a "meals and entertainment" category that's different from food served during business hours as a business necessity.)
Note that this rule does not apply when you purchase or prepare food for an activity, such as a cake for a birthday celebration. Because this is special activity food, and not a meal, you can deduct the actual cost of a cake. In fact, you must deduct the actual cost, whether or not you are using the meal rate method to figure your regular food deduction.
Refer to the food chapter in Tom Copeland's Family Child Care Record-Keeping Guide (an essential reference for all family child care providers) for further guidance.
What to do when a provider won't give out her tax ID number . . .
Give the child care provider an IRS Form W-10, Dependent Care Provider's Identification and Certification, which she is required by law to fill out and return to you. You can tell her that the penalty for not providing the information requested on the W-10 is $50.
What to do if a parent gives you a 1099
Nothing!
If one of your clients gives you a 1099-Misc for 2009 don't panic! The good news is that you do not have to be concerned with what your client might or might not be doing. Daycare is not generally a legitimate business expense for your client, but it won't affect you. EOC gives out 1099s.
Boost Your Time/Space Percentage
Otherwise known as the business percentage on Form 8829.
A day care provider's business percentage on Line 7 of Form 8829, Expenses for Business Use of Your Home, determines how much of her home expenses can be treated as a business tax deduction. It is often called the time/space percentage, because of the unique way the business percentage is calculated for family child care businesses, with a time component and a space component.
Boosting your time/space percentage can mean money in your pocket. The main way to increase your percentage is by keeping good track of time worked in the home and identifying all space used for business purposes. Having an exclusive-use child care room used 100% of the time for business purposes all year can significantly increase your business percentage.
An Exclusive-Use Room Will Increase Your Business Percentage
Here's how to do the calculation:
If you have a room in your home that you used all year for child care business purposes, and never for personal purposes, you will have a significantly higher business percentage on Line 7 of Form 8829, Expenses for Business Use of Your Home, as a result.
Time Tips:
Hours entered on Line 4 of Form 8829 should include all hours worked in the home by yourself or others, not just hours when child care children are present. You most likely work many hours in the home before children arrive, after they leave, and on weekends. Keep track of time spent on business-related cleaning (it's probably business related if you wouldn't be doing it otherwise), meal and activity planning, record keeping, talking to parents (in person or over the phone), etc.
Keep a daily log with "Time In" and "Time Out" entries for each day care child. If keeping an exact log of time worked outside of your regular hours is hard to do all year, then do it for AT LEAST TWO MONTHS EVERY YEAR. Count time your spouse or other helpers work outside of regular hours, too, but not if they overlap your own. In other words, don't count any work hours twice. If you are planning meals for an hour and your spouse is doing business bookkeeping at the same time, count that hour only once. The goal is to determine how many hours your home was used for business purposes during the year.
Don't count business time away from home. This percentage is all about use of the home. (Count your auto miles when going out for business purposes.)
Space Tips:
Many child care providers use their entire home regularly for child care purposes. 'Regular use' space can include playrooms, nap rooms, storage rooms (if accessed regularly), office space, etc., in addition to the kitchen, common rooms, bathrooms and garage. (Yes, count your garage. You most likely use it for business storage, laundry, home and yard maintenance tools, your business vehicle, etc.) Do not count yard space, however. Only count space under your roof. You can count a deck attached to your home, but not a patio.
Measure your rooms and draw a simple floor plan. Don't rely on historical square footage which is often inaccurate and not properly documented. Keep the floor plan in your records, in case you ever have to show it to an IRS auditor.
FORM 8829 BUSINESS PERCENTAGE CALCULATION EXAMPLE:
Karen has a 2000 square foot home. She uses the entire home regularly for her day care business, except for the 200 square foot master bedroom. This year she was open from 6am to 6pm, Monday through Friday. She or her husband worked an additional 255 hours during the year before opening, after closing, and on weekends. She took a week vacation and eight holidays.
Space Percentage Calculation
2,000 sq. ft. total home area [minus] 200 sq. ft. master bedroom [equals] 1,800 sq. ft. used regularly for child care business purposes
1,800 sq. ft. [divided by] 2,000 sq. ft. = .9000 = 90.00% (space percentage)
Time Percentage Calculation
My time calculation starts with the number of weekdays in a given year, which I determine by looking at a calendar. The time calculation can also be done starting with total days in a year (365 or 366), but you have to watch how the weekends fall to accurately count your regular hours, so I just narrow it down to weekdays at the start. (If you do child care on weekends, this won't work, of course.)
261 total weekdays in the year [minus] 13 days off (5 weekday vacation days and 8 holidays) = 248 total days worked
248 days worked x 12 hours per day = 2,976 regular hours worked
2,976 regular hours worked [plus] 255 additional hours worked = 3,231 total hours worked
3,231 total hours worked / 8,760 total hours in the year = .3688 = 36.88% (time percentage)
Overall Business Percentage for
Form 8829 .3688 (time percentage) [times] .9000 (space percentage) = .3319 = 33.19% (time/space business percentage)
Energy Credit Limitation Will Affect Child Care Providers
Most will have to allocate between business and personal usage
I just made an interesting observation regarding these new energy credits that will work to the disadvantage of family child care providers:
The Nonbusiness Energy Property Credit - equal to 30% of the cost of certain qualifying improvements, up to a maximum of $1,500 (for 2009 and 2010 combined)
The Residential Energy Efficient Property Credit - equal to 30% of other qualifying improvements, but it goes through 2016 and doesn't have the $1,500 cap
Both credits apply only to the taxpayer's main home and not to business property or rental real estate.
Here's the nasty bit from the Form 5695 instructions that will reduce these credits for most child care providers:
If less than 80% of the use of an item is for nonbusiness [meaning personal] purposes, only that portion of the costs that are allocable to the nonbusiness [personal] use can be used to determine the credits.
Put another way, if the business percentage for your home business is higher than 20%, you will not be able to take the maximum credits.
What about family helpers? Can you really give them a 1099 instead of a W-2?
Let's say you hired your mom and sister. They have both been working part-time since June, and she has been paying them both cash ($10hr). Can you 1099 them because they are family members, or should she be paying payroll taxes?
They are employees and payroll taxes apply. No 1099s - only W-2s are given.
There are some special rules for family employees which could apply to your mother (not your sister, though) and reduce the taxes somewhat, but payroll tax returns must still be filed and you need to give your employees W-2s at tax time.
The time to get caught up on payroll paperwork is before the deadlines at the end of January and definitely before W-2s must be sent to the Social Security Administration at the end of February.
If you haven't withheld any taxes from the payments made to your helpers, you will have to pay both the employee and employer payroll taxes, unless you can get your mother and sister to pay back the amounts that should have been withheld for social security, Medicare and state disability insurance.
Weak Economy, Tax Complexity, Diversity - All Affect Caregivers
Help for day care providers at tax time
Family child care providers have it harder than most taxpayers, with a daunting array of records to collect and organize, all while caring for children up to 12 hours per day. Figuring out how the numbers go onto the tax forms is no easy task either, especially given the special tax rules which apply only to day care businesses.
Resources for Record-Keeping and Tax Education
Highly recommended publications from Tom Copeland
All family child care providers owe it to themselves to learn as much as they can about record-keeping and taxes. You are in the best position to look out for your own best interests. I expect my clients to be a partner in preparing an advantageous and accurate income tax return. To get the best result, we have to work together.
The Redleaf Press publications by Tom Copeland JD are your most valuable resource. Tom is an attorney who has been a strong advocate for family child care providers since 1981, often interfacing with the Internal Revenue Service on their behalf, proposing new rules to benefit their businesses, and assisting with audits. He is the author of numerous child care business and tax publications. Reading his books and taking his courses is a great way to educate yourself and will help you work together with a tax preparer to get the best result on your tax return.
Besides these publications, I highly recommend Minute Menu Kids Pro software to help make record-keeping and tax time easier.
Should a parent give her child care provider a 1099 or a W-2?
Neither!
Because the child care is taking place outside of your home, you don?t need to worry about the 1099-MISC independent contractor form or the W-2 employee form.
Can I write off a large vehicle as a business expense?
Lots of auto deduction choices
If you purchase a large vehicle (SUV/Van) for child care business transportation, can you write it off as a business expense?
Yes, you can. That's the simple answer. It's more complicated than that, of course.
The amount of your deduction will depend on how many actual business miles you drive versus personal miles. If you use the van only for business driving, then you can deduct 100% of all your expenses. If you also use it for personal driving, that percentage will be lower.
You have the choice of deducting actual costs or using the standard mileage rate. If you use the standard mileage rate, you can also deduct any auto loan interest, DMV personal property taxes, bridge tolls, and parking fees. When deducting actual costs, you need to save all receipts for gas, repairs, insurance, car wash, etc.
Hosting a Holiday Party for Business Purposes?
The guest list affects your tax deduction
From working with family child care providers, I know that many of you host events where food and/or entertainment is provided.
The question is whether all of the costs associated with such parties are deductible on your income tax return.
The answer is, "It depends."
I'm not talking about parties you have for day care kids during business hours, which are always 100% deductible.
My comments concern evening and weekend gatherings for the kids and their families, in which case the guest list can determine how much of your costs are allowed on your tax return as an expense.
1099 Helpers Doing Child Care are Rare
But you may have other 1099 contract workers
Persons you pay to come into your home and work in your family child care business are almost always your employees. It doesn't matter how few hours they work. They are employees whether you hire them for one day, one week or an entire year. Full time, part time, it doesn't matter.
The only circumstance where a person helping you care for children is not your employee is if this person is in the business of providing substitute care. Such a person should be advertising to the public, give you a tax ID number, provide services to multiple child care providers, and have a business contract for you to sign. You should also receive an invoice or bill.
Estimated Tax Quarterly Due Dates
Pay by the dates shown to avoid an underpayment penalty
2011 Estimated Tax Due Dates
First Quarter: April 15, 2011
Second Quarter: June 15, 2011
Third Quarter: September 15, 2011
Fourth Quarter: January 18, 2012
Make Estimated Tax Payments
Don't wait until tax time to pay
Wage earners have taxes withheld from their paychecks. Child care providers and other self-employed persons with a positive income are required to make estimated tax payments. Otherwise, an underpayment penalty may show up on your income tax return, which is calculated on Form 2210.
To avoid the underpayment penalty, you generally must make quarterly payments during the year. Total payments must equal the lesser of 100% of your total federal tax for the prior year or 90% of what you actually end up owing for the current year. This is why they call it "estimated tax." You estimate what you will owe and send it in. Or you can fall back on the "safe harbor rule" and calculate payments based on your prior year federal tax. (Note that for higher income taxpayers - generally above $150,000 - the safe harbor percentage goes up to 110% of the prior year tax.)
This is not necessary to make estimated tax payments if you expect your business to show a loss for the year--meaning that you expect your business expenses to be greater than your child care income.
Married providers can avoid making payments if their spouse has enough income tax withheld from his paycheck to cover their joint income tax.
If you haven't made any payments yet this year or have missed payments, it's never too late to catch up and at least pay something.
Do Your Kids Work for Your Child Care Business?
Here are some tips. (Don't count chores.)
This article is courtesy of Resources for Child Caring.
Related article on this site: Hire Your Children for the Summer and Small Business Payroll Tax Guide
Many providers take advantage of the tax benefits of hiring their own children to work for their business. The wages paid to your own children can be deducted as a business expense. If your child is under age 18, these wages are not subject to Social Security/Medicare taxes, and your child doesn't have to report earnings on their tax return unless they make more than $5,350. (Wages paid to spouses or children age 18 or older are subject to Social Security taxes and must be reported as income on the person's tax return.)
When hiring your own children, you can pay them to do work for your business, but you cannot pay them to do personal household chores. What is the difference?
A recent US Tax Court case shed light on this question.
Providers who are not licensed may miss out on the home expense deduction
But other business expense deductions are allowed
If you are thinking of providing daycare out of your home for one family, do you need to be licensed in order to claim expenses as deductions on your taxes?
I am only familiar with licensing rules in California.. California does not require a license in this situation.
Looking for the new July 1 meal rates?
Used for food program reimbursements and income tax returns
The meal credit rates for home daycare are through June, 2009. When are July 1 rates be available?
The July 1, 2009 rates have been released on the USDA website. .
The new rates are effective immediately for food program reimbursements.
For income tax purposes, the July 1, 2009 rates just released will apply to 2010 tax returns.
How do child care partners split the home deductions?
I generally recommend avoiding partnerships. In the case of husband and wife owning the daycare, there remains a possibility of a Joint Venture.
If you are running a home-based child care with a partner, other than your husband/wife, this is a difficult situation tax-wise.
Is the child care operating in your home? If so, you get to take the home deductions. The partner who does not live in the home cannot share in that. You can't split the square footage.
I recommend against running a child care business as partners and instead having the provider living in the home and treat the other provider as an employee.
How do you deal with the cost of renovations and landscaping?
Know the difference between repairs and improvements
Even if you rent, you can have home repair/maintenance expenses and home improvement expenses and the trick is to differentiate between the two. Anything that is a major project (e.g. construction, landscaping) or a brand new installation (e.g. water heater, dishwasher) is an improvement. Anything that fixes an existing installation (e.g. plumbing repairs, painting, annual flower bed plantings) is considered a repair or maintenance expense.
More than one car and other business auto concerns
Is a business auto any auto used for business purposes (grocery etc)? For example: You own two cars. You take both cars at different times to do business related shopping, however, you did not keep records on what outings you took what car. Is that a problem? You also did not write down what our mileage at the beginning of 2008 was for (either of the vehicles). Is there a problem when figuring tour mileage deductions?
Affordable (?) workers' compensation insurance
Let Valoree know if you're a CA provider with an affordable policy. I have some local insurance offices I can also recommend.
Should you file separately from your spouse?
Are you married and do you live together? Married filing jointly. If not, then filing status will be discussed.
1099-MISC Forms are a Snap to Prepare
Act now and get the forms for free from the IRS
If you're a business owner (or landlord), you must give a Form 1099-MISC to any independent contractors you paid $600 or more for services provided to your business (or rental property) during the year. And you must do this by January 31. If it's February already, don't despair, follow these special February instructions immediately. If you have a home office for tax purposes, I recommend that you also give 1099s to any home service providers paid $600 or more.
Sending 1099s is not optional. They are mandatory, unless the service provider is a corporate entity. If your service provider happens to be an attorney, however, then a 1099 is always required, whether the attorney's business is incorporated or not.
Preparing and filing a 1099-MISC protects your business tax deduction. If you neglect to prepare a 1099 and later get audited, your deduction of the fees paid to the service provider will automatically be disallowed. That's a potentially hefty and immediate increase in tax for you, plus interest and penalties.
Important: 1099s cannot be used for workers who should properly be treated as your employees (and note that day care workers are almost always employees). You must provide them with a Form W-2 instead. Refer to the IRS website for help in determining how to treat your workers: Independent Contractors vs Employees.
If you need payroll help, please contact me.
To find out how easy it is to prepare your own 1099-MISC forms, read on.
Aren't 1099-MISC forms due by January 31?
Yes, but you do have some wiggle room up until February 28
1099s are supposed to be sent to recipients no later than January 31, but the true deadline is February 28. That is the deadline for mailing your 1099s to the IRS.
Workers' Compensation Insurance
If you have even one employee, this is a MUST
As stated in the Frequently Asked Questions on the website of the California Division of Workers' Compensation, California law requires employers to have workers' compensation insurance if they have even one employee. The same is true for most other states. What's truly scary are the fines imposed on employers without coverage!
I'm almost sorry to give you the details, but keep reading. It's better to hear this in advance of a problem. The good news is that you probably can find reasonably priced coverage if you need it.
Beware of Your Rights Before the IRS
You are not required to speak to IRS personnel unless officially summoned.
As part of the IRS' new program to step up enforcement, they are going to start contacting taxpayers directly via telephone calls if they have a question, are preparing to audit the taxpayer, or are engaging in collection activity against the taxpayer. Like the cop show where the cops are hoping that the suspect doesn't 'lawyer up', the IRS also hopes that a taxpayer whom they wish to speak to does not have representation. Unfortunately, they are not required to give the equivalent of the Miranda warning like the cops of TV. Be aware that you are never required to speak to any employee of the IRS in the absence of an administrative summons. There is no law or statute which requires you to do so. Please be aware of the following rights you have.
Standard Mileage Rates for 2008 through 2010
2010 rates just announced
Rates effective January 1 through December 31, 2010:
50 cents per mile for business miles driven
16.5 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
Respond Quickly to IRS Notices
Your best defense is immediate action
The Internal Revenue Services seems to be responding to the grim realities of the federal budget by auditing more taxpayers and especially sole proprietors and home businesses. This is not good news for family child care providers and other small business owners.
If you receive a notice from the IRS or your state tax authorities, remember this: It is quite likely that some or all of the proposed tax return changes are incorrect. Many notices are generated by computer and often they take away legitimate business deductions.
Quick action in responding to a notice is the best way to protect yourself against paying additional tax. If you receive a notice from the IRS or the California Franchise Tax Board, do not ignore it!
Child Care Providers Should Take a Home Inventory
You could reduce your taxes significantly
As a family child care provider, your home is your workplace. Hundreds of items all through your residence are used in your business. Furnishings and room decor contribute to the home care environment that parents have chosen for their children.
Doing a household inventory allows you to take a business deduction for furniture, appliances, and other items used in your business. I strongly urge all new child care providers to take such an inventory. Most established providers can also benefit from taking an inventory, as long as your business start date is not too far in the past and you can still remember what you owned at that time.
Gifts From Parents May Be Taxable Income
As we approach the end of the year, some parents will present their child care provider with a holiday gift. If the gift is an item (flowers, book, plant, etc.), this does not need to be reported as income. If the gift is in the form of cash or a gift card, it does need to be reported as income. You can include the cash or gift card as part of the parent child care payment, or you can list it separately as Other Income.
Bonus Depreciation Rule extended for 2009
A help to family child care providers and other business owners
An update from Tom Copeland
Update: The Economic Stimulus package passed in February extended this rule (enacted for 2008) to cover 2009 business purchases. Remember that you must purchase the item new (not used) and begin using it in your business by December 31, 2009 to qualify for the income tax deduction.
Child care providers and other business owners who buy items in 2009 may be eligible for a special 50% depreciation allowance. This allowance allows providers to deduct 50% of the business portion of the item in 2009 and depreciate the remaining 50%, thus creating a much higher business deduction this year.
Property that is eligible for this special allowance includes: computers, office equipment, furniture, appliances, play equipment, fences, driveways, and a car. The purchase of home improvements or a home does not qualify. The item must be purchased new in calendar year 2009 and used in your business this year. The purchase of a used item does not qualify.
Child Care Business Licenses
Which ones do you need?
Family child care providers are no strangers to licensing issues and it can be daunting for those starting out in business. The array of licensing and registrations required can be quite confusing. Let's review and clear up any misconceptions about social service licensing, local business licenses, fictitious business names and IRS tax id numbers.
Note: The information below applies to providers residing in the State of California, though procedures are probably similar in most other states. The last section on IRS Business ID Numbers applies to all US residents.
Social Service Licensing
Before opening the door to care for children, most family child care providers must first register with the
California Department of Social Services. This is your primary and most important license.
You start the process of obtaining a license by reading the
Pre-Orientation Registration Information and then reviewing the
Orientation Schedule in your area and registering to attend an orientation. Download and print these documents to bring with you to the orientation:
Family Child Care Home Regulation Highlights and
Application Instructions for a Family Child Care Home License.
In California, you do not need a license if you care for the children of only one family or if you care for children who are related to you. This means that you could potentially care for the children of one family, plus any number of related children, without a license.
Note that your taxable income will be higher if you are required to have a license but don't get one. This is because such an unlicensed provider cannot treat a percentage of her home expenses as a business expense on her tax return.
City Business Licenses
Most California cities and towns require business owners to obtain a business license. You will generally have to pay an annual fee or an annual tax or both. Many localities calculate their business tax based on "gross receipts," which means as a percentage of total business income (from parents, etc) before subtracting any expenses. In addition, home businesses must often obtain a special home occupation permit and pay associated fees.
New providers--contact your city or county (if you live in an unincorporated area) and find out if you are required to have a business license. If you've been in business for a while and never inquired about a business license, do it now. Many California cities are getting residents' income tax information from the Franchise Tax Board and cross-checking to find unlicensed businesses. An on-going business found in this manner is likely to be billed for several years back taxes and fees.
Here is a 2007 list of California cities receiving information from the Franchise Tax Board regarding sole proprietor business owners:
Albany, Alhambra, Auburn, Bellflower, Brea, Burbank, Carmel-by-the-Sea, Carson, Cathedral City, Colton, Corona, Corte Madera, El Segundo, Fremont, Gardena, Gilroy, Huntington Beach, Irvine, Livermore, Long Beach, Los Angeles, Merced, Millbrae, Newport Beach, Oakland, Orange, Pasadena, Paso Robles, Pleasant Hill, Pleasanton, Rancho Palos Verdes, Rialto, Richmond, Roseville, San Clemente, San Diego, San Dimas, San Francisco, San Jose, San Juan Capistrano, San Rafael, Santa Ana.
There may now be additional cities on this list.
Fictitious Business Names
Many day care providers simply operate their business, and open a business bank account, under their own name. Some use a made up name, such as "Anna's Loving Care." This is called a "fictitious business name" and it must be registered with the county. Registration allows you to open a bank account and accept check payments under your business name.
Contact your County Clerk/Recorder's Office to file a Fictitious Business Name Statement. If you search online, you will find a number of businesses who will take care of this paperwork for a fee. The process is actually quite simple. You don't need to pay for help unless you want to.
First search county records to be sure that no one else is using the name you have chosen. Next submit your county forms (several copies) with the filing fee. You should receive back three copies with the official stamp of the county clerk. One is for your permanent records. Another is for your bank and will be needed if you wish to open a bank account using your business name. A third is for a newspaper of general circulation in your area.
Your Fictitious Business Name Statement must be published within 30 days. Choose the cheapest deal. You needn't publish in the biggest paper in town.
The newspaper should handle everything for you. They publish your notice four times and then send the affidavit of publication to the county clerk. When all is said and done, you will receive a Proof of Publication back from the county with their official stamp.
Fictitious business names generally last for a certain period (usually five years) and must be renewed before the period is up.
IRS Business ID Numbers
You do not need to register with or obtain any kind of business license from the Internal Revenue Service. Some folks find this surprising.
Most family child care providers are sole proprietors, meaning you own and run the business and have not set up any kind of separate entity, such as a corporation**. Sole proprietors are not required to get a tax ID number from the IRS, because you file your tax return under your social security number. If you have employees, however, you have to get an
Employer Identification Number (EIN).
I recommend that all child care providers go to the IRS website and
Apply for an EIN, even if you don't have employees. Give your EIN to vendors (meaning folks who pay you, like the food program) and especially to parents. Parents will need a tax ID number to claim the Dependent Care Credit on their tax return. It is best to get an EIN and protect the privacy of your social security number.
**Note: I caution any provider thinking of setting up a corporation, partnership, or LLC not to rush such a decision. Consult with your tax advisor and research the issue thoroughly.
Functioning as a sole proprietorship is usually the most straightforward, easiest, and cheapest way to structure a family child care business.
Child Care Workers Are Almost Always Employees
Independent contractors are few
Persons you pay to come into your home and work in your family child care business are almost always your employees. It doesn't matter how few hours they work.
They are employees whether you hire them for one day, one week or an entire year. Full time, part time, it doesn't matter. Independent contractor situations are rare for daycare providers.
Even if it's late in the year, it's not too late to get caught up on the proper employer paperwork and eliminate the audit risk that exists when deducting non-employee helper payments on your income tax return. Contact me for help. You have until the end of January (or possibly February) to provide your employees with a Form W-2.
Check out our Affordable Payroll Service.
Standard Meal Rates for Family Child Care Providers
Optional rates for computing food cost
Standard Meal Allowance Rates for 2009 income tax returns
(in the continental U.S.)
$1.17 for each breakfast
$2.18 for each lunch or supper
$0.65 for each snack (up to 3 per day)
Accurate meal and attendance records must be kept when using the standard meal rates.
Family child care providers may deduct actual grocery cost as a business expense on their income tax return or you may use the standard meal rates provided in this article to calculate your food deduction. Using the standard meal rates is easier and safer, in case of an audit. If you have records showing attendance and meals served, the IRS will not contest a food deduction based on the standard rates.
Daycare Tax Tip: Bad Debt
From Tom Copeland at the Redleaf National Institute
October 2007
If a parent leaves owing you money, you cannot deduct this as a business expense. You can't deduct what you don't get, but your taxable income for the year will be lower.
A "bad debt" is only deductible if you previously reported the money as income. So if you reported as income $100 that a parent paid to you in December and then the check bounced in January, you could deduct the expense in January.
