Taking A Short Break from Your Business? How Will it Affect Your Taxes?
Let's say that later this year you will take a short break from caring for children as a family child care provider.
The reason?
To take a vacation, maternity leave, care for a sick relative, or some other reason.
You might take a week off, two weeks, a month, or even longer.
How will this impact the calculation of your Time-Space Percentage and the taxes you will pay?
In an article "How to Claim Expenses When You Aren't In Business a Full Year" I discussed how to handle the situation when you close your business permanently before the end of the year. Now we are talking about shutting down temporarily during the year.
When you take a break from caring for children, you will work fewer hours. This will decrease your Time-Space Percentage and reduce your house deductions. As a result, you will pay slightly more in taxes.
An example of how this works
Let's say you shut down your business for one month. You normally care for children 11 hours a day, 5 days a week. In addition, you work an extra 10 hours a week on business activities after the children are gone. If you worked a full 52 weeks under this schedule, your total work hours for the year would be 3,380 hours (11 hours x 5 days a week = 55 hours a week + 10 hours a week = 65 hours a week x 52 weeks = 3,380 hours per year).
That's equal to a Time percent of 38.5% (3,380 hours divided by 8,760 hours in a year). If you had $10,000 of house expenses (property tax, mortgage interest, utilities, house repairs, house insurance and house depreciation) you would be able to claim $3,850 in house deductions.
If you closed for a month you would be working 260 fewer hours in a year (65 hours a week x 4 weeks = 260). Your new Time percent would be 35.6% (3,380 hours - 260 hours = 3,120 divided by 8,760). Your house deductions would now be $3,560 - a loss of $290 in deductions.If you did some business work in your home (cleaning, record keeping, activity preparation, etc.) during the month you were closed, you can count these hours and thereby reduce your loss of deductions.
You would use your lower Time-Space Percentage against twelve months of house expenses (even though you were closed for a month) and all other shared expenses (cleaning supplies, furniture, etc.).
I know that the vast majority of family child care providers don't take a month's vacation! But, it's nice to dream about it!
Note: In this article I haven't discussed the Space Percent. I'm assuming it will remain the same, even if you close your business for a month. If your Space Percent is 100%, the numbers above remain the same. If your Space Percent is 90%, your Time-Space Percentage will drop from 34.65% to 32.04%, or a loss of $261 in deductions.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.picpedia.org/post-it-note/v/vacation.html
For more information on how to calculate your Time-Space Percentage, see my book Family Child Care Record Keeping Guide.
