Family child care providers will be able to claim up to $1,500 in house expenses on their 2013 tax return, without receipts, according to a new IRS rule (IRS Rev. Proc. 2013-13).
Child care providers who choose to use this rule will not be able to deduct any other house expenses: house depreciation, utilities, house insurance, property tax, mortgage interest and house repairs.
The intent of this new safe harbor rule (which applies to all home-based businesses) is to simplify the record keeping requirements and save taxpayers’ time by not filing IRS Form 8829 Expenses for Business Use of Your Home.
Note: This new rule will not take effect until 2013. It does not affect your 2012 taxes. You do not have to use this new rule. You can continue to file Form 8829 the same you always do for 2013 and thereafter.
The IRS is asking that comments on this rule be submitted by April 15, 2013. I have drafted a letter that asks for clarifications of some aspects of the rule and makes recommendations for changes in the rule.
This rule will have a major impact on the family child care field. Because it will eliminate the need for providers to calculate their Time-Space % on Form 8829, many are likely to use the rule.
Many tax preparers are also likely to recommend that their clients use the rule because of its simplicity.
However, after looking closely at the rule, I believe that the vast majority of providers will not benefit from using it.
In general, providers with fewer than $5,000 in house expenses may benefit from using this rule while those with higher than $5,000 in house expenses are likely better off not using the rule. The vast majority of providers have more than $5,000 in house expenses. In addition, providers with a Time-Space % above 35% are also likely not to benefit from this rule.
Under the IRS rule the maximum deduction a provider could claim for her house expenses is $1,500. My key recommendation to the IRS will be to allow providers to count all the square feet they use in their home for their business, up to a maximum of 2,000 square feet (for a maximum deduction of $10,000).
Highlights of the Rule
• The rule will go into effect on your 2013 tax return. All licensed family child care providers as well as license-exempt providers can use this rule.
• It’s voluntary. Providers can switch back and forth between using this safe harbor rule and filing Form 8829 from one year to the next. Once a method is chosen for one year it can’t be changed for that year. This means the provider cannot amend her tax return later to switch methods.
• The safe harbor deduction is based on multiplying the number of square footage of the home used on a regular basis for the child care business by $5 per square foot. The maximum square feet that can be claimed is 300. Therefore, the maximum deduction is $1,500 (300 square feet x $5 per square foot). As a practical matter, all family child care providers use more than 300 square feet of their home and so they will be able to claim the maximum $1,500 deduction.
• Using the safe harbor rule means not being able to deduct any other house expenses (depreciation, utilities house insurance, property tax, mortgage interest and house repairs). For most providers these expenses are significant and choosing this rule would represent a major loss of deductions.
• All other business related expenses (food, toys, children’s supplies, car expenses, liability insurance, office expenses, etc.) can continue to be deducted on Schedule C.
• Providers who use the safe harbor rule can deduct 100% of their property tax and mortgage interest on Schedule A (rather than splitting these expenses between Form 8829 and Schedule A).
Issues That Need Clarification
My letter to the IRS asks that these issues be clarified:
How would a provider who chooses to use this rule calculate the business portion of her shared business/personal expenses (cleaning supplies, furniture, shared toys, etc.) since Form 8829 would not be filed?
Would a provider who chooses this rule be allowed to deduct the following house expenses: furniture, appliances, playground equipment, fences, computers, etc.?
Would a provider who has items in an exclusive use room (furniture, toys, equipment, etc.) continue to be allowed to use the Section 179 rule and deduct these expenses in one year?
How would a provider claim depreciation expenses for her home, fence and home improvements if she used Form 8829 in year 1, then switched to the safe harbor rule in year 2, and then back to Form 8829 in year 3?
If a provider’s husband uses their home for his business, can he choose to use the safe harbor rule and she continue to file Form 8829?
My letter to the IRS recommends the following changes to the rule:
Allow providers to count all the square feet they use in their home for their business, or in the alternative, up to a maximum of 2,000 square feet (for a maximum deduction of $10,000).
Allow providers to amend their tax return to switch back and forth between using the safe harbor rule and filing Form 8829.
Add a cost of living adjustment to the $5 per square foot allowance.
A Call to Action
I want to hear your opinion about this new rule. Will it help you or not? How would you like to see the rule modified? What would you change in my letter? You can post a comment on my blog, send me an email at firstname.lastname@example.org, post on my Facebook page, or call me at 651-280-5991 to ask a question or share your views.
I will consider all suggestions up until March 1, 2013. I will then finalize my letter and send it to the IRS on March 15th. At that time I will post my letter on my blog and ask those who agree with it to send an email to the IRS endorsing what I have written. You can also send your own letter to the IRS. See details.
I will be writing more about this rule over the coming months on my blog. Sign up to receive future email alerts about my future articles by entering your email address under “Subscribe” on my blog. It is free.I urge the entire family child care community (child care providers, Food Program sponsors, CCR&R agencies, family child care associations, unions, and other groups) to alert others about this new rule.
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Child Care Providers
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Facebook: The IRS is changing the rules and they affect family child care providers. Tom Copeland wants to make sure the IRS considers your best interests so read his blog and comment. Tell him what you think and any questions you have (http://bit.ly/14pkuU7)
Twitter: The IRS has changed a rule that affects #familychildcare. @asktomcopeland wants to make sure it helps you. Read and share your thoughts (http://bit.ly/14pkuU7)
Tom Copeland - www.tomcopelandblog.com
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