Tom Copeland Letter to IRS on Behalf of Bethany Marcoe
Here's a letter I wrote on behalf of family child care provider Bethany Marcoe for her IRS auditor:
Wednesday, June 13, 2012
Dear Valerie Bolden:
I am writing to respond to two issues that came up during our recent meeting: the exclusive use of rooms in my home and the reporting of Food Program reimbursements for my own child.
Exclusive Use Room
You stated to me that I could never claim my basement area and toddler playroom as exclusive use rooms in my home. You gave two reasons for your position. First – once day care children leave a room it is no longer used for business purposes and therefore cannot be claimed as an exclusive use room. Second – there is no way to prove that my family does not use these rooms when day care children are not present in the home.
IRS Code Section 280A(c)(1) establishes the rules under which a home-based business may claim house expenses using the exclusive use rule. Code Section 280A (c)(4) spells out the exception to this general rule for family child care providers. There is nothing in the Code that excludes family child care providers from using the exclusive use rule.
The Instructions to IRS Form 8829 Expenses for Business Use of Your Home contains a special section on family child care (“Special Computation for Certain Daycare Facilities” – page 2) which says, “If the part of your home used as a daycare facility includes areas used exclusively for business as well as other areas used only partly for business, you cannot figure your business percentage using Part I. Instead, follow these three steps:” It goes on to describe how to claim an exclusive use room.
IRS Publication “Child Care Provider Audit Technique Guide” says, “A provider may have a combination of exclusively used rooms and regular used rooms, which is discussed in the instructions of Form 8829. See IRS Section 280A(c)(4).”
Later, the Guide says, “The Form 8829 instructions provide detailed computation directions for the cases where the provider’s business usage consists of a combination of exclusively-used rooms and regularly-used rooms. Note to Examiner: Since there are no set norms, the examiner must establish the facts and circumstances in each case to determine the elements that go into making up the business-use-of-the-home percentage, discussed in more detail below, including the total square footage of the house and the business-use portion. The initial interview is essential to gather the facts, especially the room(s) that are used regularly or exclusively or both.”
Clearly, IRS rules allow family child care providers to claim an exclusive use room.
The description of exclusive use in Code Section 280A does not define what is considered business use. However, I think it is fair to say that no home-based business actively operates 24 hours a day, 365 days a year. In other words, if the home-based business was a writer, or tax professional, or stock day trader, it is reasonable to assume that these business owners leave the room to eat, sleep and do other personal activities in the course of a day.
Under your logic, the only time a home-based business would be entitled to count an exclusive use room would be when there is a business activity being conducted in the room 24 hours a day, 365 days a year. This is not the intent of Section 280A because if it was, there would be no businesses that could meet this test. Therefore, it is not necessary for me to have children in an exclusive use room 24 hours a day, 365 days a year for me to claim an exclusive use room. When day care children leave my basement area and toddler playroom, the room is not converted to a personal room. My business toys, furniture and other items that remain in the room are not used for personal purposes. Since these rooms are never used personally after my day care children leave, they continue to be 100% business use rooms.
Your second objection is that I can’t prove that my family never uses my two exclusive rooms for personal purposes. This sets up the impossible goal for me to prove a negative. The only absolute way to prove that these rooms are never used for personal purposes is for me to video-tape both rooms 24 hours a day, 365 days a year to show that none of my family members entered these rooms when day care children were not present. This is an impossible record keeping standard.
As a family child care provider I am in the same position as all other home-based businesses who have exclusive use rooms. That is, if there is no evidence that I can present that would prove to you that I use my rooms exclusively then there is no evidence any home-based business can provide to prove that their rooms are used exclusively. This cannot be, otherwise the exclusive use rule has no meaning.
I have testified that these rooms are exclusively used for my business. I have shown you photographs of the rooms that support my position. The photos do not show any personal items. I cared for eleven day care children. My own son will be 11 years old in July. He does not need to use the toys in the basement because he has his own toys. Attached are pictures of his room that show the toys that he uses. My son does not enter the toddler playroom because the items in this room are not suitable for him. You have no reason to distrust my testimony or the photographs. If there is some other proof I can offer to support my position, please let me know.
In looking over my records I realize that I made a mistake in how I calculated the exclusive use space of my toddler playroom and my basement. I included as part of my exclusive use space the basement laundry room and bathroom. I did use the laundry room for personal purposes and occasionally used the basement bathroom for personal use. Therefore, I have recalculated my business use of home as follows:
Total square feet of home: 2,108Basement area exclusively used (17’x17’): 289 square feet
Toddler room exclusively used (13’x10.5’): 136.5 square feet
Total square feet exclusively used: 425.5/2,108 = 20.18%
Square feet regularly used for business: 1,682.5/2,108 = 79.81%
Hours spent on business activities: 4,240/8,760 hours in year = 48.4%48.4% x 79.81% = 38.63%38.63% + 20.18% = 58.81% business use of home
If you continue to argue that it’s impossible for me to have an exclusive use room, please provide me with some written authority that supports your position.
Food Program Reimbursements
My son received reimbursements from the Child and Adult Care Food Program. I did not report the amounts I received from him as income on my Schedule C and I did not claim as a food expense any food that he ate.
You told me that I must report the reimbursements from my son as income, going forward. This is contrary to IRS rules.
Page 2 of IRS Publication 587 Business Use of Your Home says, "Do not include payments or expenses for your own children if they are eligible for the [CACFP] program."
The IRS Child Care Provider Audit Guide says, “The provider should not include the amount of the payments for his/her own children because it is not taxable.” Later the Guide says, “Under IRC Section 262, no portion of the cost of food provided to the provider's family, including food consumed by the provider or the provider's own children, is allowed as a deduction.”
Therefore, I followed the proper procedure in not reporting his reimbursements as income and not reporting his food expenses. If you continue to argue that I must report my son’s reimbursements as income, please provide me with some written authority to support your position.If you have any questions, please contact me.
Sincerely, Bethany Marcoe
