November 13, 2008

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.

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!

I cannot emphasize this enough. No matter what the notice says, you may not owe anything. If you fail to respond to the notice, however, the IRS will assume that you do owe the additional tax and they will move very quickly, within 30 days or less, to finalize the changes. After that it is not long before your "tax deficiency" is carved in stone. Then your only options are to pay the tax (plus penalties and interest), try to negotiate a settlement with the IRS (difficult these days), go to court, or wait for them to levy your bank account and place a lien on your home.

Halloween was last month, but can you tell that I'm trying to scare you into action? Believe it or not, the IRS wants your input. Every notice provides a contact number and a response due date. Either you or your official representative must make contact by that date and the earlier the better.

Contact your tax return preparer immediately and get their input regarding any notices you receive.
Do not delay! I have seen notices with response periods as short as 10 days. If your tax preparer is an Enrolled Agent or a CPA (or a tax attorney), he or she can get your Power of Attorney and contact the IRS for you.

If you do not have a tax preparer, or they cannot do this kind of representation work, or you prefer to have someone else help you (a good idea if you suspect your preparer of making mistakes on your tax return): Find an Enrolled Agent to help you: NAEA Enrolled Agent Directory.

Most of my clients contact me right away when they receive a notice. Some, however, literally cannot open those IRS envelopes and prefer to hide them away in a drawer somewhere. If this is you, ask your tax advisor or a family member to open them for you! Ignoring notices for only six months recently cost one child care provider $30,000 in tax that she really did not owe.

We are going to see more and more tax return changes sent out by mail. Protect yourself by getting help and responding promptly.

New Bonus Depreciation Rule Will Help Providers in 2008
A Newslink update from Tom Copeland

The Economic Stimulus Act of 2008 that gave many providers a rebate check also contains a business tax benefit for providers.

Providers who buy items in 2008 may be eligible for a special 50% depreciation allowance. This allowance allows providers to deduct 50% of the business portion of the item in 2008 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 2008 and used in your business this year. The purchase of a used item does not qualify.

If you are planning to purchase an eligible item this year, this new 50% depreciation allowance will help you reduce your taxes in 2008. However, it is never a good idea to purchase something just because you can get a significant tax deduction. The amount of the tax deduction you will get by purchasing something will never be equal to the cost of the item to you.

Read the rest of this October 2008 Newslink newsletter from Resources for Child Caring to see an example of how this special allowance works.

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 us review below and clear up any misconceptions.

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 of 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 (example form is from Alameda County). 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 needn't 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. I recommend that you sit back and wait for the solicitations that will come in the mail from newspapers in your county who publish legal notices. (They will get your address from the county clerk.) 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 (five years in Alameda County) 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.

For further information and assistance in obtaining an Employer Identification Number, please read my "Get an EIN" Tax Tips Post.

**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. Read my "To Incorporate or Not" Tax Tips Post. Functioning as a sole proprietorship is usually the most straightforward, easiest, and cheapest way to structure a family child care business.

Educate Yourself
and find the right tax pro

I can tell that tax time is near because I am hearing from a steady stream of new child care providers. They are being proactive and looking for help with their record keeping and taxes. These folks will be happy they took the time now to get organized and decide how to handle their income tax filing.

If you are a provider (new or experienced) looking for help with your 2008 taxes, now is the time to find it. Better than waiting until January, February, March or (heaven forbid!) April, when your choices will be narrowed and finding the right person can be difficult.

California providers, feel free to contact me now to get acquainted. Take advantage of a free hour consultation (in person or by phone) between now and December 31.

I recommend that providers in all states look for an Enrolled Agent to work with. Enrolled Agents have demonstrated competence (we're tested by the IRS) and we are able to interact with the IRS on your behalf when necessary. Using the NAEA Enrolled Agent Directory is one way to find an Enrolled Agent in your area. There is also a handy Tax Preparer Directory available at the Resources for Child Caring website (formerly the Redleaf National Institute) where you should find preparers familiar with family child care taxes.

No matter where you find your tax preparer or who recommended them, no matter what their credentials, you must work closely with them to assure their knowledge of child care taxes and the proper preparation of your tax return. Tom Copeland's 2008 Tax Companion book can help.

Ongoing education regarding family child care record keeping and taxes is a must. Too many providers bring me tax returns with blatant errors which they should have detected themselves.

Check over your completed tax return carefully.
You sign the tax return and you are responsible for its contents. Most importantly, you pay the price if the IRS doesn't like what they see!

Tax Workshops with Alison
December 2008 in San Jose

I will be teaching two workshops next month sponsored by Smart Start San Jose and held at the Martin Luther King Jr. Library located on the corner of 4th Street and San Fernando.

Tax Preparation Workshops for Childcare Providers
Sat., December 6, 2008 (in English only)
Sat., Dec. 13, 2008 (with Spanish translation)
10:00am to Noon
San Jose, CA

For further information, contact the San Jose Public Library's Early Care and Education Services Unit at 408-808-2617.

Local Tom Copeland Workshops
February 2009 in Hayward & Fremont

We are very lucky that 4C's of Alameda County is again hosting two Tom Copeland workshops in February. I hope to see you there!

Taxes & Record Keeping Tax Update for 2008
Thursday, February 12, 2009
6:30pm - 9:30pm
Hayward, CA

Hiring Employees in Your Family Child Care Program
Tuesday, February 17, 2009
6:30pm - 9:30pm
Fremont, CA

To register, download and mail in 4C's Tom Copeland Workshop Flyer. Contact Pam Buckholtz at 510-584-3114 for further information.

Day Care Record Keeping 101
Updated for 2008

My colorful, two-page, quick reference guide to day care record keeping was announced at this time last year and is now updated with auto and meal rates for 2008.

The file download takes a minute or so over a high speed connection. California residents may contact me to receive a two-sided hard copy by mail.

California Family Child Care Associations, Resource and Referral Services, and others, please email me or call 800-616-1268 to request larger quantities for distribution.

Take a Household 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.

Items in your inventory can include window coverings, rugs, kitchen utensils/dishes/bakeware, towels, bed linens, toys, play structures, video games, TVs, DVD players, wall decorations, strollers, lamps, musical instruments, pillows, books, lawn mower, tools, etc. The list goes on.

Your deduction is based on the resale value of these items as of your business start date and is calculated using depreciation tables which divide up the deduction over a certain number of years (usually seven). Items purchased after your business start date are depreciated based on their cost, but for items you already owned when you started business, you must estimate what the items could have sold for at a garage sale or on eBay.

See this sample household inventory done by a first year provider for her 2007 taxes. If you have a slow Internet connection, download just the first page. This is a superb example of a thorough inventory done using the Redleaf Press Inventory-Keeper.

You can document your inventory any way you choose, but using the Inventory-Keeper booklet is a very handy way to go. I especially like how the booklet suggests all kinds of items for each room that you may otherwise overlook. The more items you document, the greater your tax savings.

To give you an idea of what is possible, consider that the sample inventory above generated a list of household items worth a total of about $22,000 as of the provider's business start date. A time/space percentage of 25% would bring her "business basis" for these items to $5,500. This means that if her time/space percentage stays steady at 25%, she will deduct $5,500 in additional business expense over seven years. I would expect a married California provider with a working spouse to save perhaps $2,700 in tax over that time and project a single provider to save perhaps $1,900. Actual tax savings will depend on how much total income is reported on the provider's tax return.

The numbers above show that it's well worth your time to document all of your STUFF. We all have a lot of it and you might as well turn it into a tax deduction! For your efforts you will also create an excellent record for insurance purposes.

Meal Allowance Rates
Rates for 2008 & 2009

Family Child Care Providers may deduct their actual grocery cost or use the standard meal rates shown below to calculate their deduction. Records must be kept of attendance and meals served.

Standard Meal Allowance Rates for 2008
(in the continental U.S.)

$1.11 for each breakfast
$2.06 for each lunch or dinner
$0.61 for each snack (up to 3 per day)

Standard Meal Allowance Rates for 2009
(in the continental U.S.)

$1.17 for each breakfast
$2.18 for each lunch or dinner
$0.65 for each snack (up to 3 per day)