* A new provider may have a large number of expenses to start her business and filling her spaces takes many months longer than she expected.
* Two or three families suddenly leave a child care provider who is unable to replace them for the rest of the year.
* A child care provider lives in a large home with high property taxes and mortgage interest payments.
* A child care provider decides to limit the number of children in her program to a few children.
These situations are not uncommon and the recession has reduced the income of many. Still, child care providers should understand how the IRS looks at your business if you do show a loss.
Family child care is a pro-profit business (even though it may not seem like it!). When you start your business the IRS assumes that you are trying to make a profit. As long as you do make a profit every three of five years the IRS will continue to assume you are trying to make a profit. However, if you don't your chances of being audited increase substantially. It's possible that even a one year loss of a large amount (thousands of dollars) can attract the attention of the IRS.
I have seen many providers get audited because of large business losses. If you do get audited because of your losses, the IRS is likely to deny some of your deductions. They will argue that a business trying to make a profit would not spend so much money.
There is one unusual Tax Court case out of California in which a new family child care provider claimed tens of thousands of dollars in losses that were disallowed, but in the end the provider was still allowed to show a loss of several thousand dollars.
My advice? Claim all the business deductions you are entitled to claim for which you have receipts or other records. Don't worry if you show a loss every few years. Try not to show losses more than two out of every five years by reducing your expenses.
Image credit: blog.hada.org
For more information, see my book, Family Child Care Record Keeping Guide.
Copyright 2011, Tom Copeland, www.tomcopelandblog.com