Are CACFP Reimbursements Taxable Income?

This question continues to confuse some family child care providers, Food Program (CACFP) sponsors, and tax professionals. 

The short answer is Yes.

There is an exception - reimbursements received for a child care provider's own child is not taxable income. 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 program [Food Program]." The reason is that such reimbursements are considered a "benefit" under Food Program regulations and not subject to taxes, like food stamps.

How should you report Food Program reimbursements on your tax return? Here's where there is the confusion. 

IRS Publication 587 says: "Reimbursements you receive from a sponsor under the Child and Adult Care Program of the Department of Agriculture are taxable only to the extent they exceed your expenses for eligible children. If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C. If you food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C."

Therefore, if you follow these instructions and your reimbursements were $4,000 and your food expenses were $5,000 you would should show zero income and $1,000 of food expenses on Schedule C. This is called the "netting" method - you are showing the net income or expense on Schedule C.

However, a newer IRS publication has recommended that child care providers not use the "netting method". The IRS Child Care Provider Audit Technique Guide, revised in 2009, is the publication used by IRS auditors to help them understand the family child care business when they are auditing them. It says: "If the provider receives reimbursement for food costs through the CACFP 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."

The Audit Guide goes on: "The netting method is not a preferred method since an [IRS] Examiner will always be looking for the food reimbursement amounts. When you report the amount separately, the Examiner will more easily be able to account for the payments."

Therefore, using the above example the provider should report $4,000 as income and $5,000 as a food expense.

In my many years of experience with IRS audits I have never seen an auditor request that the child care provider use the netting method. Instead, the auditors want to see all the Food Program reimbursements reported as income and all the business food expenses claimed as a deduction.

If you use the netting method you are paying the same taxes as someone who shows all the income and all the expenses. Therefore, you won't be in trouble with the IRS if you do use this method.

If the child care provider in our example was not on the Food Program she would report zero income from reimbursements and claim $5,000 in food expenses. When she does join the Food Program her taxable income will rise by $4,000.

Don't let someone tell you that you shouldn't report your Food Program reimbursements as taxable income. They are probably confused about the netting method. Show them this blog post if you need to convince them.

If you are having problems with your Food Program sponsor about this, I would be happy to contact them.

If you have questions about this contact me at: tomcopeland@live.com

Image credit: littledixie.org

For more information, see my book Family Child Care Record Keeping Guide. 

 

 

 

Copyright 2011, Tom Copeland, www.tomcopelandblog.com

Comments

[Justin]

Interesting. Do you add the food cost for daycare children under "Meals and entertainment (80%)" or under "other expense"? This is not clear.

[Tom Copeland]

Put your food expenses under Other Expense on Schedule C, not Meals and Entertainment.

[C Dow]

Reimbursements are for 2 meals and 1 snack if I am correct. This is a Federal Food program it should be non taxable period we have kids that eat three meals and upto three snacks who are at out daycare for over 9 hours. What about our time for all the double record keeping we have to do for CACFP. What about our time and electricity for cooking and preparing or going out to buy these foods..Give us a break good god..We literally work a 10 hour hands on day then clean and sanitize do bookeeping and the like for another 2-3 hours thats a 13 hour day to take care of kids!! It is utterly rediculous that we would have to further worry about the IRS or an auditor paid for by our county ss dept from us applying for help with Health Insurance to up end us in an audit with their expertise especially when they are 9-5ers who punch the clock on my dime. We have been doing this as a group family daycare for 8 years and these last few have been skinny years..Once again it is rediculous..Thank you for the information I am going to bring this info with me to my audit by seasoned accounts that the county has sought out for their services to HELP (NOT) me with trying to get low or free health insurance for my wife and I.

[Tom Copeland]

The Food Program will reimburse you for either two meals and a snack or two snacks and a meal. I agree with you that the food reimbursements received under this program should not be taxed to family child care providers. Unfortunately, that is not the law. Fortunately, most providers can show food expenses that exceed their Food Program income.

[Victoria]

Tom: Is this correct?: For the CACFP reimbursement we can claim only 2 meals and 1 snack OR 2 snacks and 1 meal. However, according to IRS rules, we can claim as business expenses all meals and snacks served even if they do not meet CACFP meal components requirements or exceed the meals reimbursement allowance. This aaplies whether we use either the standard (per meal/snack) deduction amount or actual food purchase expenses.

[Tom Copeland]

The Food Program will only reimburse up to three servings a day (two meals and a snack or two snacks and a meal). However, if a provider uses the standard meal allowance she can deduct up to six servings a day per child (one breakfast, one lunch, one supper and three snacks). In receiving reimbursements a provider must serve nutritious food, but in claiming food expenses, the meals and snacks do not have to be nutritious (whether the provider uses the standard rate or the actual cost of the food).

[Debz]

Thank you so much for this information. I had been reporting the total income from food program. I now know to subtract the money I receive for my own children.Now I have to decide if I want to go back and file amendments for the 200 bucks a year.

[Jeanne]

Thanks for this information. I don't know where to show the amount of money I was reimbursed for my own children so it doesn't show up as taxable income. Any advice?

[tom]

If you receive a Form 1099 from your Food Program sponsor, show the entire amount on line 6 of Schedule C. Then determine the amount of reimbursement you received for your own child and add this amount to your food expense for the day care children. This will wipe out the income.