Does My Tax Preparer Understand My Business? Part II

Family child care providers are entitled to deduct hundreds of household items as business expenses, unlike every other home-based business.

This unique ability to deduct items such as cleaning supplies, furniture, appliances, snow blowers, and beds is sometimes not recognized by all tax preparers.

Providers can use the recent article, "The Ins and Outs of Day-Care Provider Taxes, Part II" as a useful tool to educate their tax preparer about what they can deduct as a business expense.

The article is directed at tax preparers and is published in the EA Journal, the professional journal of the National Association of Enrolled Agents. Enrolled Agents have passed an IRS test and can represent taxpayers who are audited by the IRS. Enrolled Agents are more likely to understand small businesses such as family child care providers than CPAs. Providers may want to share this article with their tax preparer to ensure they are claiming all of your business deductions.

Part I of this article discussed what to claim as income, how to handle bartering, why the home should be depreciated and more. It contains a long and excellent explanation of the Time-Space Percentage, including a useful Worksheet that shows how to claim some rooms as regularly used for your business and other rooms as exclusively used for your business.

Part II of this article covers in detail what can be deducted as business expenses on Schedule C:

• Car and truck

• Education expenses

• When claiming expenses using the $2,500 rule may not be a good idea if you are showing a loss

• Insurance (homeowners, liability, workers compensation)

• Interest (credit cards, home loan, car loan, personal loans)

• Legal/Professional fees

• Office expenses

• Cell phones and landlines

• Supplies (baby supplies, first aid, cleaning, parties, decorations, laundry, clothing for children, linens, paper products)

• Toys, books, gifts

• Licenses, taxes

• Meals to employees are only 50% deductible

• Food expenses for children

• Wages for employees

My feedback

I had a few reservations about some of the things in the article.

The article says, “If your client wants to take grocery store mileage, she should be able to support that this is a trip exclusively for the day care and provide alternative proof of personal grocery shopping trips.”

I do agree that providers should keep records of all trips (business and personal) to stores to help make the case that her business trips are really business trips. However, there is no requirement that a trip to a grocery store must be exclusively business before it can be claimed as a business trip.

Earlier in the article it says, “The ATG for CC [Child Care Provider Audit Technique Guide] states deductions are allowable if they are primary for business and not deductible if primary for personal. The mileage, in order to be deductible, must be related to the primary trade or business.” I agree. So, a provider who buys $100 worth of business food and $30 worth of personal food is entitled to deduct this trip to the grocery store.

The article says, “in order for the mileage to be deductible, there must be a profit motive present. Transporting the children on a field trip might require an explanation to an auditor. How is the trip profit related?” The article gives examples of providers charging parents for such trips or going to the zoo or museum.

But, I believe a provider can successfully argue that virtually any field trip, by definition, is for the educational benefit of children. Caring for children no matter where they are is what a provider is being paid for, thus there is a profit motive. Going to the park, going to the library, going to the beach, etc. all involve enhancing the education opportunities for children.

In a later paragraph the article says, “Let’s circle back to the grocery store example for a moment. Is it a profit motive if the food is reimbursed? Perhaps.” Wait a minute! A provider must provide food for the children, whether she is reimbursed for the food or not. So, buying food is clearly an ordinary and necessary business expense. The profit motive is to meet her licensing requirements by serving nutritious food.

Under the Depreciation section the article says that unless the business use is 50% or greater a provider must use straight line depreciation. I agree that this applies to listed property (vehicles), but there is no IRS rule that disallows MACRS accelerated depreciation for furniture, appliances, fences, and other personal property unless they are used more than 50% for the business.

Under the Safe Harbor Election section, the article says that this must be elected before the start of each year. This used to be the rule, but it is no longer.  Providers can simply add their election statement with their tax return. This Safe Harbor Election allows providers to deduct in one year any item costing less than $2,500.

Under the Toys section the article says, “Sometimes, these items are purchased at garage sales. Remind your client that receipts are still required.” It goes on to say that the IRS will not allow this deduction without a receipt. But, the IRS rules don’t say that a receipt is required to claim a deduction. It says that an “adequate record” is required. A provider who previously owned an item that is later used in her business could deduct the fair market value of the item at the time it was first used in the business. No receipt is required.

The IRS Child Care Provider Audit Technique Guide tells providers they can depreciate items owned before their business began. No receipts would be reasonably expected for such items. In any case, the taxpayer is estimating the fair market value, so a receipt isn’t the final word. Clearly, a receipt is strongly recommended, but it’s not required.

The article later says, “Food program income is not taxable. However, food served to children is deductible.” This is extremely misleading! The article goes on to say that providers should report the food program reimbursements as income and deduct the full amount of food served to day care children. That is correct! But, this totally contradicts the previous two sentences. Many providers and tax preparers are confused on this issue. IRS Publication 587 tells providers to net the income and expense, but the IRS Child Care Audit Technique Guide tells tax preparers not to use the netting method.

Under the Wages section the article says that children of taxpayers under age 21 but over age 18 are exempt from federal unemployment tax, which is true, but it fails to say that they are subject to Social Security/Medicare payroll tax withholding.

Despite these errors, the article does a good job of identifying many deductions family child care providers can claim on their Schedule C.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.forbes.com/sites/kellyphillipserb/2019/02/07/how-to-find-the-perfect-tax-preparer/?sh=486d803016f9

For more information on what is deductible in family child care, see my book Family Child Care Record Keeping Guide, which lists over 1,000 deductions.