Increasingly family child care providers seek outside help when filing their tax returns. This includes using tax professionals and online tax preparation software. In two previous blogs I've discussed using tax professionals.
Child care providers should be extremely cautious when using tax preparation software. The bottom line is that if you don't know exactly what you are doing when filling out your business tax forms, don't use tax software.
I've looked closely at TurboTax and H&RBlock's online tax software programs. They can be useful in doing math calculations and completing tax forms and they can catch some mistakes. However, they can also create a lot of problems for you if you aren't careful!
Both TurboTax and H&R Block can trip you up when you claim household expenses such as supplies, repairs, and office expenses. Let's use supplies as an example. A provider spends $400 on supplies that are used 100% for her business. She buys another $1,000 of supplies that are used for both business and personal purposes. Let's say her time-space percentage is 35%.
A screen on both software programs will ask you to enter your business expense for supplies. What do you put down? The correct answer is $$750. How do you get there?
You can deduct the full $400 of supplies that are only used in your business. You can deduct the time-space space percentage of shared supplies ($1,000 x 35% = $350). The total is $750.
The problem is that neither software program will help you figure this out. You must know how to do this on your own. You must know how to calculate your time-space percentage and how to apply it in this situation. This same problem can arise in every situation where you have a category of expenses that contain both 100% business items and shared items.
There are additional problems with these software programs. Here is a listing of some, but not all:
1) They do a poor job of explaining how to calculate your time-space percentage. They don't indicate that you can count hours spent on business activities in your home when the children are not present. H&R Block does not allow you to claim an exclusive use room. These are significant omissions.
2) They do not do an adequate job explaining how to depreciate items for your business and they use depreciation schedules that are not always accurate. This can result in showing lower business deductions than you are entitled to.
3) They don't point out that reimbursements you receive for your own children from the Food Program are not taxable income. Correction: Turbo Tax does point this out.
Addition: You can call the customer support line for help with software programs.
If you understand all of these rules then using tax preparation software can be helpful. If you don't, or you are not sure, then don't go near them. Instead, find a tax professional who is familiar with your business or use my Family Child Care Tax Workbook and Organizer to do your own taxes.
This is the last of my three-part blog on how family child care providers can get help in filing their 2010 taxes. The first blog was on Finding the Right Tax Professional. The second blog was on Questions to Ask Your Tax Professional.
I'm happy to answer your tax questions - firstname.lastname@example.org
Image credit: taxcut2010.us
For more information, see my book Family Child Care Tax Workbook and Organizer.
Copyright 2011, Tom Copeland, www.tomcopelandblog.com