Tom Copeland's Taking Care of Business

Plan Ahead for the New Crib Standards

Keeping young children safe is the most important job of a family child care provider. New rules at the end of 2012 will require all family child care providers to use cribs that meet a higher safety standard.

In December 2010, the U.S. Consumer Product Safety Commission (CPSC) voted to approve new stricter, mandatory crib standards. As of June 28, 2011, all manufacturers and retailers were required to make and sell full-size and non-full-size cribs that meet these new standards.

As of December 28, 2012, family child care providers, as well as all other child care programs, cannot use a crib unless it meets this new standard. 

New cribs can be expensive, particularly if you are caring for more than one infant. Therefore, you may want to plan ahead for this purchase. 

Tax tip: If you buy a new crib in 2011, you will be able to deduct 100% of the cost this year on your taxes using the new 100% bonus depreciation rule. If you buy one in 2012, and use it more than 50% of the time in your business, you will be able to deduct the entire business portion using the Section 179 rule. See my article for more information.

With this new requirement, we are likely to see a number of crib owners selling their old cribs at garage sales, on Craigslist or Ebay. If you normally buy from these vendors, be careful not to buy a crib that does not meet this new safety standard. You should also consider not trying to sell or give away your old crib, since it can be a safety hazard for the new owner. It's best to destroy your old crib.

For more details about the new crib standards, visit the Crib Information Center, sponsored by the CPSC.

Thanks to Blake Crosby for alerting me to this issue.

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The Earned Income Tax Credit for 2011

The Earned Income Tax Credit is for workers with low to moderate incomes. You may be eligible as a family child care provider.

You can qualify for this credit if you make a profit in your business and file in any manner except as married, filing separately. Your child must be under age 19 at the end of the year (or under age 24 at the end of the year and a full time student). Regardless of age, if your child is permanently and totally disabled you may qualify for the credit. Your child must also have lived with you for more than half the year.

To qualify for the credit, if you are married filing jointly, your adjusted gross income must be less than $18,470 (for no children); $41,132 (for one child); $46,044 (two children); or $49,078 (three or more children). The income eligibility limits if you are single are: $13,660, $36,052, $40,964 and $43,998.

 The maximum credit without a child is $464; for one child is $3,094; for two children $5,112; and $5,751 for three or more children.

Sometimes child care providers are given bad advice and try to raise their Earned Income Credit by not claiming all the business deductions they are entitled to. This is illegal. IRS Publication 596 Earned Income Credit (EIC) says, "When figuring your net earnings from self-employment, you must claim all your allowable business expenses."

Because of the way the Earned Income Credit is calculated, there are some situations where you could get a bigger credit, and thus a bigger refund, if your income was slightly higher. (This may not make sense, but it can happen.) Although you may be tempted to not claim some business deductions to get a higher credit, don't give in. 

Note:  Some of the parents in your program may be eligible for this credit. You can alert them by giving them a copy of a flyer summarizing this credit and other federal and state child care tax credits put out by the National Women's Law Center.

Here's an article I wrote that identifies a variety of tax credits that you, or the families in your program, may be eligible for.

Image credit: dhs.iowa.gov

When is an Exclusive-Use Room Exclusive?

As a family child care provider, the answer to this question will make  a significant difference in reducing your taxes. 

The biggest expenses you have as a business are the ones associated with your home: property tax, mortgage interest, utilities, house insurance, house repairs and home depreciation. Your Time-Space Percentage will determine the business portion of these expenses that you can deduct.

In addition, you will use your Time-Space Percentage to deduct other expenses that are used for both business and personal purposes: furniture, appliances, toys, equipment, cleaning supplies, etc.

Because these expenses represent thousands of dollars, even a small increase in your Time-Space Percentage will make a big difference.

One way you can substantially increase your Time-Space Percentage is to have an exclusive-use room. This is a room that is used only for business purposes. I've written a previous article about how to calculate your Time-Space Percentage if you have an exclusive-use room. 

There is a strict test you must pass to be able to call a room an exclusive-use room. As a general rule, a room must be used solely for business purposes. This means that if your own children enter the room to play on week nights or on the weekend, the exclusive use is destroyed.

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Can I Deduct an Unpaid Child Care Bill?

Unfortunately not.

I know from my travels around the country that many family child care providers do not receive all the money that is owed them. This problem is more severe during financial hard times.

Here are some situations where this occurs:

* A parent bounces a check or leaves owing money for child care provided

* A parent leaves without giving proper notice under the contract and doesn't pay for the last two weeks of care

* A child care subsidy program declares that a parent is no longer eligible and tells the child care provider she will not be paid

In all of these situations, the child care provider is owed money. Unless she pressures the parent to pay, or takes the parent to court, she will have less income at the end of the year. How should this be treated on her tax return?

You must report all money you received caring for children on IRS Form Schedule C. If you didn't receive money you earned, you do not report it as income. However, money you earned but didn't receive, cannot be reported as a business expense. If the parent owes you money in 2011 and you collect it in 2012, report it as income in 2012.

Similarly, you cannot deduct a discount (or a scholarship) you give to a parent. See my article, "I Gave a Discount to a Parent. Can I Deduct It?"

Because you will be reporting less income, your taxes will be lower. I realize that this is small consolation. 

The only way to be sure you are not owed money is to require parents to pay in advance. See my article, "Don't Let Parents Leave Owing You Money." When caring for subsidized families, you may or may not be able to require parents to pay in advance. Check with your subsidy worker.

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Did You Miss Deducting Your Home Assessments?

Did you know that you can deduct the cost of home assessments for such things as a sidewalk, curb and sewer?

I didn't until this year. And I've been assisting family child care providers with record keeping and tax issues for over thirty years.

When you pay your property tax, look on your tax bill. It may include your share of the costs for work done by your city to install a new sidewalk, curb or sewer line to your home. You must subtract any such home assessments from your property tax before reporting your property tax expense on IRS Form 8829 Expenses for Business Use of Your Home.

But, you can deduct the business portion of house assessments on IRS Form 4562 Depreciation and Amortization. Because of the new 100% bonus depreciation rule, you can deduct 100% of the business portion of these assessments as a land improvement on Form 4562, line 14.

Let's look at an example. Robin Provider has a property tax bill for 2011 of $6,000. Her Time-Space Percentage is 40%. $1,000 of her property tax is for a sidewalk assessment. Robin will report $5,000 on Form 8829, line 11b as property tax ($6,000 - $1,000). Robin will deduct $2,000 of this amount ($5,000 x 40% = $2,000) on this form.

Robin will put $400 ($1,000 x 40%) of her sidewalk assessment on Form 4562, line 14 when she elects to use the new 100% bonus depreciation rule. This new rule allows child care providers to deduct 100% of the business portion of new items purchased in 2011. Items that qualify include land improvements such as a fence, driveway, patio, sidewalks, curbs and sewers. Normally, home improvements must be depreciated over 15 years, so this is a great deal. The 100% bonus rule is set to expire at the end of 2011.

For more on the 100% bonus depreciation rule, see my article "It's a Big Deal: New Bonus Depreciation Rule!"

I'm glad I learned something new this year!

Image credit: barkhamstedhistory.org

For a comprehensive discussion of the 100% bonus depreciation rule, see my 2011 Family Child Care Tax Workbook and Organizer.

How Can You Deduct Family Medical Expenses?

Medical expenses can be a major family expense.

There are three ways a family child care provider can deduct such expenses to reduce her personal federal income taxes.

There are two ways you can use medical expenses as a business deduction.

Business Deduction

1) You can set up a medical reimbursement plan (called a Section 105 Plan) that will allow you to deduct medical expenses as a business deduction. These medical expenses can be for you, your spouse, and your children. These expenses must not be already covered by insurance. They can include medical insurance premiums paid by your husband at work, drugs, copayments, diagnostic fees, examination fees, hospital bills, orthodontia, braces, hearing aids, wheelchairs, eyeglasses, contact lenses, etc.

For every $1,000 of uninsured medical expenses, you can expect to save between $300-$400 in taxes because they will reduce both Social Security and federal and state income taxes.

To take advantage of this medical reimbursement plan, you must set up your husband as your employee. However, you do not have to pay him a salary and worry about paying payroll taxes. I won a US Tax Court case for a family child care provider on this issue. There has also been a recent appeals court case (Shellito v. Commissioner) that says the same thing.

To meet all the requirements of setting up a medical reimbursement plan properly, I strongly recommend that you hire someone to set this up for you. (The cost of setting one up is 100%  tax deductible.) The largest national company that sets up such plans is called TASC (Total Administrative Services Corporation). They call their plan BizPlan. To find the BizPlan representative in your area, call 888-595-2261.

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Do You Have a Bonus Coming?

Now is the time of the year for family child care providers to see if parents in their program can give them a bonus. This bonus does not cost the parents anything. How is this possible?

Many employers offer a dependent care assistance program that allows employee parents to set aside up to $5,000 of their salary each year for child care expenses. Parents do not pay federal or state income taxes on the money they set aside. This will save them hundreds of dollars in taxes.

These plans are also called flexible benefit plans or cafeteria plans.

Parents must decide how much of their salary to set aside before the year begins. If they don't spend it all on child care by the end of the year it will be kept by their employer.

Child care providers want to make sure that they receive all of the money parents set aside under this plan.

Here's how to get this money.

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How a Roth IRA Can Benefit Your Dependents

Family child care providers who are making contributions to an Individual Retirement Arrangement (IRA) this year should look closely at the Roth IRA.

Although you do not get a tax deduction for your contribution, in the long run it is more financially beneficial than a Traditional IRA (in most situations).

There are also other, largely ignored, benefits of a Roth IRA versus a Traditional IRA.

The Roth IRA offers you the added flexibility of providing financial assistance to your spouse and children. This includes withdrawing contributions (held for at least five years) tax-free to help meet the financial needs of your family.

I discuss these benefits in detail in my article "How a Roth IRA Can Benefit Your Dependents" that is posted at www.ira.com.

For general information about the Roth IRA, see my blog article.

Image credit: mo-cpablog.com

For more information about all of the IRAs available to you, see my book Family Child Care Money Management and Retirement Guide.

I've Lost My Receipt! Now What?

As we come to the end of the year, it's time for family child care providers to start pulling together their business receipts and other records to get ready for filing taxes.

Keeping good records means having documents that back up your business income and expenses. IRS rules say that you should have an "adequate record" for each expense that you claim on your taxes. The ideal adequate record is a receipt for each purchase.

But what if you don't have a receipt? Maybe you lost it or never received one. What do you do now?

If you don't have receipts, you can still claim expenses on your tax return without them. Other adequate records may include: cancelled check, credit or debit card statements, written records you create, calendar notations, and photographs.

All is not lost even if you are missing some of these records at tax time. You can take steps to reconstruct records that will be acceptable to the IRS in an audit. Here are some examples:

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The Basics of Record Keeping Webinar - November 15th

"The Basics of Record Keeping" is the title of my monthly webinar that will be broadcast Tuesday, November 15th at 8:30pm Eastern Time. It is sponsored by the National Association for Family Child Care and will last for 90 minutes.

This webinar will help you learn how to keep essential business records, claim proper deductions, and legally reduce your taxes.

It will also cover:

* How to claim food expenses using the standard meal allowance rule

* The key record keeping rules that will save you money

* How to calculate your Time-Space percentage to maximize your deductions

* How to depreciate your furniture, appliances, and home improvements

* More

These monthly webinars are an opportunity to watch a power point presentation on your home computer and listen to me cover these important issues. You'll have the opportunity to ask me questions live and you will receive a copy of the power point, plus handouts. You will also receiving a training certificate of attendance.

Don't miss this fun opportunity!

The cost is $25 (100% tax deductible!). To register, contact Tracy Halverson at 801-886-2322; thalverson@nafcc-mail.org.

To see my upcoming webinar schedule.

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

 

 

2011 Tax Changes

There have been a number of significant tax changes this year that affect family child care providers. All of them are beneficial and they will help reduce your taxes.

For details, see my 2011 Family Child Care Tax Workbook and Organizer.

*  The standard meal allowance rate for 2011 for the 48 states is: $1.19 breakfast, $2.22 lunch/supper and $.66 snack. The 2011 rate for Alaska is $1.89 breakfast, $3.60 lunch/supper and $1.07 snack. The 2011 rate for Hawaii is $1.38 breakfast, $2.60 lunch/supper and $.77 snack. The rates for 2012 for all states increased by over 4%.

* The standard mileage rate for January - June is $.51 per business mile and $.555 for July - December.

* A new 100% bonus depreciation rule allows you to deduct (rather than depreciate) the entire business portion of the following new items in 2011: furniture, appliances, office equipment, and fences. Homes and home improvements are not eligible for this rule.

* The Social Security tax rate on your business profit has dropped 2% to 13.3%.

* If you have improperly treated assistants as independent contractors, the IRS will offer relief from an IRS audit, if you apply for the Voluntary Classification Settlement Program.

* Retirement plan contribution limits for 2011: Regular or Roth IRA $5,000 (plus $1,000 if age 50 or older); SIMPLE IRA $11,500 (plus $2,500 if age 50 or older); SEP IRA 18.58% of profit.

 * Saver's Tax Credit eligibility limits: $56,500 married filing jointly; $28,250 single.

* The federal unemployment tax rate has dropped to .6% after June 30, 2011. 

I've created a handout of this article that you can use in training workshops.

Image credit: ehow.co.uk

For more information, see my book 2011 Family Child Care Tax Workbook and Organizer.

 

 

 

Copyright 2011 Tom Copeland, www.tomcopelandblog.com

It's a Big Deal: New Bonus Depreciation Rule!

A major tax law change for 2011 can help lower taxes for many family child care providers.

If you buy certain types of items in 2011, you may be eligible to use a new 100% bonus depreciation rule. This rule allows you to deduct 100% of the business portion of the item in 2011.

Property that is eligible for this special rule includes: computers, office equipment, furniture, appliances, play equipment, fences, driveways, and a car. The purchase of a home or home improvements does not qualify. The item must be purchased new in calendar year 2011. A used item does not qualify.

Here’s an example of how the 100% rule works:

• Let’s say you bought a living room couch for $1,000 in March 2011 and your Time-Space Percentage for the year is 40%.
• $1,000 x 40% = $400 (the business portion of the couch)
• $400 x 100% = $400 (the amount of the depreciation that you can deduct on IRS Form 4562, line 14 in 2011)

Note: If you bought a $1,000 swing set that was used 100% for your business, you could deduct $1,000 under this rule.

Instead of using this rule, you could depreciate the couch over seven years and deduct $57.16 ($400 x 14.29%) in 2011. But, as you can see, you will get a significantly higher deduction using the new bonus depreciation rule. 

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