I recommend that all providers participate in the Child and Adult Care Food Program sponsored by the U.S. Department of Agriculture (USDA). This federal program reimburses eligible providers monthly for serving nutritious food. The USDA provides both Tier I and Tier II reimbursement rates. Tier I will apply to low income child care providers. If you currently receive the Tier II Food Program reimbursement rate, you can still take an income tax deduction based on the higher Tier I rates.
The Food Program offers a good source of income and improves the nutritional health of children. If you hesitate because food program reimbursements are generally taxable**, remember that all of your day care business income is taxable! You still want all the income you can get, don't you?
The Food Program reimburses participants for up to two main meals and one snack per child per day (if served) based on reimbursement rates that are updated every July 1. Reimbursed meals must be nutritious and you must save menus, in addition to keeping track of meals served.
In addition to reporting food program reimbursements as income on your tax return, you also get to take a food deduction. This deduction can be based on your actual food cost or the standard meal allowance rates.
Be aware that for income tax purposes, you can deduct the cost of up to one breakfast, one lunch, one supper and three snacks per child per day (if served). This is several meals above the number reimbursed by the food program. Therefore, be sure to keep track of all meals served--not just those that the qualify for reimbursement. In many cases, the food cost deducted on your tax return will be greater than the amount of your Food Program income.
** Thank you to reader Tony from Minnesota for reminding me to point out that not all food program reimbursements are taxable. You can exclude reimbursements for meals served to your own children who are eligible for the program. At the same time, the cost of food served to your own children (or other family members) is not tax deductible.
Tony also points out that IRS Publication 587 instructs providers to report as taxable only food program reimbursements in excess of the provider's food cost (actual or based on the rates below). Or, conversely, to deduct any food cost in excess of food program reimbursements. Thus, the instruction is to "net" food reimbursements and food cost and only report the difference. DON'T DO THIS. It's confusing and the recently updated (2009) IRS Child Care Provider Audit Technique Guide recommends the more straightforward approach:
If the provider receives reimbursement for food costs through the CACFP (Child and Adult Care Food Program) or any other program, the provider can report all the reimbursements under the income section of Part I of the Schedule C and then deduct the food expenses in full, which is the recommended method especially when the provider receives a Form 1099 from the program, or the provider can net the amount reimbursed against the food expense.
I think that it is easier and more straightforward to show all taxable food program reimbursements as income and 100% of food cost for day care children as an expense on your business Schedule C. In the end result, the provider pays the same amount of tax either way.
Last updated 18 May 2011
Posted on 2010-06-02 00:29:38