February 14, 2007

Tom Copeland of the Redleaf National Institute recently came through Northern California and I had the good fortune to attend his local tax training workshop at 4Cs of Alameda County in Hayward.

Though it's awfully busy around here, I couldn't pass up the opportunity to send you what I thought were Tom's best tidbits and reminders for day care providers.

Yours truly,

Alison

Tracking Meals Served

Be sure you are tracking all of the meals you serve, not just those reimbursed by the food program. This will give you the option to use the standard meal rates for your income tax food deduction.

For non-reimbursed meals, you only need a daily tally showing which child received a breakfast, lunch, dinner or snack. Count up to three snacks per day per child. You don't need to keep menus.

Here are the standard meal allowance rates for 2006: $1.06 breakfast, $1.96 lunch/dinner, $0.58 snack;

and for 2007: $1.06 breakfast, $1.97 lunch/dinner, $0.58 snack.

Accurately tracking the meals you serve, even the snacks, can make a big difference in your food deduction. If you serve three snacks per day to one child all year, that alone gives you a deduction of about $435! (I assumed five days per week for 50 weeks.)

Eating Out with the Kids

Here's a reminder that I needed myself. If you use the standard meal allowance rates to calculate your food deduction, you cannot also deduct the cost of prepared food bought at restaurants or fast food outlets. Your complete food deduction will be based only on the meal rate calculation.

You can deduct the cost of eating out only if you are deducting your actual grocery costs, rather than using the standard rates. If you use the actual cost method, remember to save ALL of your grocery receipts, even those for personal food. If you are audited you will have to be able to prove to the IRS that you did not deduct 100% of your grocery bills as a business expense.

Are Your Grocery Receipts Fading?

Some providers at the tax training brought up the fact that their grocery receipts are fading over time. Tom strongly advised taking steps to preserve the information. An IRS auditor will not be sympathetic if all you can produce are illegible receipts! Options include photocopying receipts or scanning them to save digitally. Also, ask store managers to use different register tape and/or permanent ink.

Of course, if you use the standard meal rates, you can forget about saving grocery receipts altogether, except those that contain purchases for supplies or other non-grocery items.

Tracking Your Hours

Yes, more tracking, but the result is a much lower income tax bill...

Now I am talking about tracking your hours working at home when the day care children are not present. Most providers put in many such hours for cleaning, meal and activity planning, paperwork and bookkeeping, talking to parents on the phone, etc. If I'm not mistaken, Tom indicated that the national average is 14 hours per week. This is nothing to sneeze at and can significantly increase your time/space percentage, which, in turn, significantly increases your business deductions.

Here's the word from Tom Copeland: For two consecutive weeks EVERY YEAR, track the hours you work in your home when the kids are not there.

Use a calendar of some sort and carefully note down time spent on every home-based activity for the two weeks. (Time spent away from the home doesn't count.) Count your spouse's hours, too, but only if they are in addition to your own hours. If the two of you work together for one hour, it counts only once.

Continued to column two....

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Tracking Your Hours, cont.

If you choose two weeks that represent your normal work hours after children are gone, you don't need to track any longer than that. (Though, of course, you can if you want to!) Do this time tracking annually, so that you have records every year to support your time/space calculation.

One last recommendation: During those two weeks, keep track of ALL the time spent cleaning your home, even if you don't consider it to be business cleaning. Just as with groceries, you want to be able to prove to the IRS that you have allowed for the fact that some of your house cleaning time is personal.

Gift or Activity?

Tom would argue that gifts for your day care children are not the same as regular business gifts, which are limited to $25 per person per year. Birthday parties are required activities for a family child care business and he suggests deducting gifts to the kids as an activity expense. Gifts to parents or others must still be limited to $25 per year. Be sure to differentiate when documenting your gift expense.

Homeowners: Always Depreciate

Don't forget to depreciate your home, if you own it. You always come out ahead that way. For some reason there are a number of tax preparers out there who discourage day care providers from claiming home depreciation. That is just dead wrong and bad advice.

Remember: Even if you don't deduct home depreciation, you will have to pay tax on it when you sell. There is no way around this rule. It applies even if you sell your home after your day care business has been closed for years. So deduct the depreciation already! Especially since the tax savings now outweighs the tax owed at sale.

It is possible to go back and claim home depreciation that you should have taken in prior years using IRS Form 3115. Consult your tax advisor or see Tom's explanation in the Family Child Care 2006 Tax Workbook and Organizer.

Final Tidbits

--Protect yourself from identity theft by giving parents your Employer Identification Number (EIN), instead of your social security number. Get an EIN online at the IRS website in minutes, if you don't have one: IRS Online EIN Application. On line 9, choose reason "other" and enter "identity theft."

--Use IRS Form W-9 to provide your tax id number to parents (preferably an EIN, as indicated above). Tom recommends writing on the W-9 the total day care fees received from the parent during 2006 and having them sign the form to show that they agree with the amount. Keep a copy for your records. You are not required to give your tax id number over the phone to parents.

--You can still deduct auto loan interest, even if you use the standard mileage rate method.