Here are the rest of the questions and answers from the February 28, 2011 webinar "How to Reduce Your Taxes for 2010 and 2011"
Q: When claiming my food expenses do I need to keep attendance records?
A: Yes. You need to be able to show what children were present each day and what meals and snacks you served them.
Q: What do I do if I didn’t keep attendance records for 2010?
A: Reconstruct these records for each child in your care in 2010 and have their parents sign your record indicating that their child was in your program on the days you have reconstructed. Then go ahead and use the standard meal allowance rate to claim food expenses for those days.
Q: Can I count the meals served to my own children as a food expense?
A: No. Even if you were reimbursed for meals served to your own children by the Food Program you can never deduct their meals as an expense.
Q: Can I deduct my sister’s children’s meals if she pays me to take care of them?
A: Maybe. If you are being paid to care for your sister’s children and the amount you are being paid is comparable to what other parents are paying you then you have created a business relationship with your sister and the meals would be deductible.
Q: I have a daycare parent who needs help transporting her child to my care. I meet her halfway between her home and mine. Can I claim mileage for this daily trip?
A: Yes. You can deduct trips as long as the primary purpose of the trip is for your business. This clearly qualifies. Since you are transporting children, contact your car insurance agent to make sure you are fully covered.
Q: I can deduct a portion of my monthly car payments?
A: No. If you are using the actual car expenses method for claiming car expenses, you can depreciate the value of your car, but never a portion of the loan payment.
Q: If I am using the actual expenses method do I need to have receipts for my car expenses?
A: Yes. Since it’s more work to save car receipts (gas, oil, repairs, etc.) most providers use the standard mileage rate to claim car expenses.
Q: If I enter my car mileage into the Minute Menu software program will this be accepted by the IRS as an adequate record?
A: It should be. Print out the mileage report on Minute Menu each year and put it with your tax records.
Q: Can I claim car expenses when I drive to buy supplies?
A: You can count a trip as a business trip if the primary purpose of the trip is business. If you buy more business supplies than personal supplies, count the trip.
Q: Can I deduct the expense for a car wash if I’m using the standard mileage rate to claim car expenses?
A: No. When using the standard mileage rate you can only count $.50 a mile (for 2010), parking, tolls, and the business portion of car loan interest, and car property tax. Nothing else.
Q: I have been horrible about keeping track of my miles. Is there anything can I do?
A: Yes. Go back and look at the following records that you can use to reconstruct how many miles you drove in 2010: receipts, cancelled checks, credit/debit card statements, bank deposit slips, check register, calendar notations, photographs, and any other notation that indicates you drove somewhere.
Q: How do I claim mileage for grocery shopping when I’m purchasing for both my business and my family?
A: You can only claim trips that are “primarily” for your business. Many providers always spend more money on business food than personal food. If so, don’t claim every trip to the grocery store as business. Maybe claim half the trips or percentage of the trips based on the percentage of food purchased that was for your business.
Q: I belong to a daycare association. Can I deduct the miles and time spent attending their meetings?
A: You can deduct the miles because the trip is primarily business. You can’t count time unless the meeting is in your home.
Q: If I have a cell phone and a second business line can I deduct the cost of my cell phone?
A: You cannot deduct the monthly cost of the first phone line into your home (whether or not it is a cell phone). You can deduct the business portion of a second phone line you use for your business. Use your time percent as the measure of the business portion for the second line. If you use your second line more than your time percent, keep records for a month or so to show your actual use.
Q: Where do I record my cell phone expense on Schedule C?
A: You can put it on any expense line. Perhaps it should go on line 18 Office Expenses.
Q: Can I deduct an IPhone because I only bought it to send videos and photos to the parents while they are at work?
A: You can deduct the business portion of the IPhone as long as you have another phone line into your home.
Q: Can I deduct the actual cost of the phone?
A: Yes. You can deduct the purchase price of the phone, even if it is the phone that is the first line into your home.
Q: My phone bill is combined with my cable and internet bill. How do I figure out how much I can deduct for my business?
A: I would assume that your phone bill is one-third of the total bill. If so, and you only have one phone line, claim the time-space percentage of your cable and internet cost. If you have more than one phone line, see if you can break out the cost of the second line.
Energy Tax Credit
Q: Can I count the purchase of a portable or window air conditioner towards the energy tax credit?
A: No. Eligible items for this credit include an energy efficient central air conditioning system, furnace, and energy efficient doors, windows, and roof.
Q: Can I depreciate the cost of these energy efficient items in addition to claiming this tax credit?
Q: Can I claim the energy tax credit for the purchase of new appliances?
Q: Can I use the additional 50% depreciation allowance rule for my home improvement (basement remodeling and adding a sink)?
A: No. Home improvements and the purchase of the home are not eligible for this rule that allows you to claim 50% of the depreciation deduction in 2010 for the purchase of new items. Eligible items include: computers, printers, copies, furniture, appliances, child care equipment, fence, and patio.
Q: Will the additional 50% depreciation allowance be around for 2011?
A: We don’t know yet.
Q: I might be quitting day care this year. Should I still claim this 50% depreciation on my 2010 tax return?
A: Yes. If you go out of business before you have fully depreciated an item you won’t have to pay any of it back.
Q: We purchased a new 5th wheel camper in 2010. Can I depreciate it as a business expense?
A: You would only be able to depreciate an item if it’s “ordinary and necessary” for your business. I assume that your day care children are not going camping with you so I would not try to deduct this. If your children ate occasional meals in the camper I would still say that this is not ordinary and necessary.
Q: In 2010 we purchased a new HD television for the living room. It is the main television that the kids watch. Can I deduct this?
A: Yes. Since it’s used for both business and personal purposes, apply your time-space percentage. You would also be eligible to use the new 50% depreciation rule.
Q: Can I deduct a new snow blower using this 50% depreciation rule.
Q: When I enter furniture into Minute Menu it asks me for the “method” and “convention.” What does this mean?
A: Method refers to straight line or accelerated. Enter accelerated for everything except your home. Put half-year convention for everything except your home and home improvements. For those two expenses enter mid-month.
Q: I purchased 6 cots online and they cost a total of more than $100. However, individually they cost less than $100. Do I have to depreciate this? Can I deduct the cost of the delivery?
A: You only have to depreciate something if it individually costs more than $100 (there are some exceptions to this general rule). So, you can deduct these cots in one year. Yes, include the cost of the delivery as part of your deduction.
Q: I bought a laptop in 2008 and started depreciating it. In 2010 it died. I then bought a new one in 2010. How do I deduct these laptops?
A: When an item you are depreciating wears out before the normal depreciation period, claim all the remaining depreciation in the year it wears out. Computers are depreciated over 5 years. In 2010 claim the last 3 years of depreciation for the old laptop. Start depreciating the new laptop over 5 years. You can use the new 50% depreciation rule for the new laptop.
Q: Is there a maximum amount I can depreciate?
A: There is no maximum amount.
Q: My tax preparer told me not to claim depreciation on my home as I plan to move shortly. Why do you recommend claiming depreciation on the home?
A: You always want to depreciate your home, no matter what. Your tax preparer’s advice is dead wrong. When you do sell your home you will have to pay tax on the depreciation you claimed (or were entitled to claim) on your home while using it for your business. That means you will pay the tax even if you didn’t depreciate it! Home depreciation is a big deduction for most providers, so don’t lose out on this tax benefit now. You will pay the same tax later whether or not you depreciate.
Q: I use Minute Menu. Do I have to enter my inventory/depreciation every year?
A: Yes, enter items that you purchase each year into Minute Menu. You can then print out reports (Form 4562 Report) each year to show to your tax preparer so he/she can depreciate them.
Q: If I pay the city for water, sewer and garbage on one bill, do I need to separate them out when deducting them on Form 8829?
A: No. List them together as utilities.
Q: Can I deduct the cost of scrubs that I wear during day care hours?
A: Yes. Normally you can only deduct clothing if it’s considered a uniform; that is, something that is not suitable to be worn outside of your home. Scrubs would meet this definition.
Q: I have shirts with my logo on them. Can I deduct them?
A: Yes, because this would be considered advertising.
Q: I have some house repairs that were 100% business. Where do I put them on Form 8829?
A: Put your 100% house repairs on Form 8829, line 19a (direct expense). Put all shared expenses under column b (indirect expenses).
Q: Can I deduct the premiums of my health insurance if I am eligible for COBRA insurance?
A: No. You can only deduct health insurance premiums if you are not eligible to participate in an employer sponsored health plan. COBRA is considered an employer sponsored health plan.
Q: I purchased something that is 100% used for my business, but my own child does play with it after hours. Can I deduct 100% of the cost or is this now a shared expense?
A: It’s a shared expense. You claim expenses based on how they were used, not why you purchased them.
Q: Why would I need a record of the hours I worked?
A: Because you will use these hours to calculate your time-space percentage on Form 8829 Expenses for Business Use of Your Home. Your time-space percentage is used to determine how much of your house expenses and shared expenses you can deduct for your business.
Q: Should I adjust the total hours in the year on Form 8829 if I was closed for six weeks of maternity leave?
A: No. Don’t change this. The result of being closed for six weeks is that your time-space percentage will be lower. You will still apply this percentage to 12 months of your house expenses.
Q: What is a reasonable range for a time-space percentage so that it doesn’t send up a red flag?
A: If you care for children 11 hours a day this represents 33% of the year. If you spend an average of 13 hours a week on other business activities when children are not present this represents 8% of the year. Most providers are using 90-100% of the space in their home on a regular basis in their business. Therefore, most providers have a time-space percentage of between 35-45%. Some providers work 24 hours a day for part of the week. Other providers use rooms in their home exclusively for their business. In both cases their time-space percentage can be above 50%. Don’t worry about sending up a red flag. Keep good records and claim what you are entitled to.
Q: When claiming expenses such as supplies, do I include the sales tax as part of the expense?
Q: I don’t have any children of my own. I purchased some infant items that are used in my business. If I claim 100% of this cost in 2010 and I have a child of my own next year, will I have to pay some of this back?
A: No. Once you have fully deducted something for your business, it doesn’t matter if in later years it is used by your family.
Q: If I’m on the Food Program can I deduct expenses using my grocery receipts? Can I claim meals I served to the children before I was on the Food Program?
A: Yes, you can deduct food expenses using grocery receipts. However, you must save all grocery receipts, business and personal. The other choice is to use the standard meal allowance rate and not have to save any food receipts. Yes, you can count meals served before you were on the Food Program.
Q: Can I deduct gifts given to me at Christmas such as new pots and pans?
A: Yes, these are ordinary and necessary expenses and are therefore deductible. It doesn’t matter that you received them as a gift. Look up the prices at the store or an online catalog.
Q: Can I have too many deductions? Can they hurt me?
A: As a general rule you must claim all your business deductions. The higher your deductions the lower your profit and the lower your taxes. However, if by claiming all your deductions you will show a loss I would be more careful. Claiming a loss every few years or so is okay. Showing a loss two or more years in a row can attract more attention from the IRS. Don’t claim all your deductions if by doing so you will show a loss three years in a row.
Q: Can I deduct the cost of gifts/presents I buy for the children in my care for birthdays and Christmas?
A: Yes. There is a difference between a gift and an activity expense. If it’s a gift you can only deduct up to $25 per child per year. If it’s an activity expense there is no limit as to how much you can deduct per person. A gift is something you give the child that is wrapped and taken home by the child. An activity expense is something you give to the child that is used by the other children during day care hours.
Q: Can I deduct an Education Savings Bond I purchase for a child in my care at Christmas?
A: Since this is a gift and not an activity expense, you can deduct up to $25 of the cost of this Bond.
Q: If I pay my teenagers to clean and prepare crafts and food for my business can I deduct this cost?
A: Yes. However, if your children are age 18 or over you must withhold social security/medicare taxes from their pay and you must file quarterly payroll tax forms to pay these taxes. Check with your state department of revenue if you must purchase workers’ compensation insurance.
Q: Can I hire my mother (who is on Social Security) to work in my business?
A: Yes. If your mother has reached her full retirement age (66 or 67) she can earn as much money as she wants without it affecting her social security benefits. You need to keep careful records of what work she did, when she did it, and how much you paid her. You must withhold social security/medicare taxes, withhold state and federal income taxes, and purchase workers’ compensation insurance. She must report this as income. A better way to go might be to not pay her but give her gifts. That way it’s not income to her, not subject to any payroll taxes or workers’ compensation. But then you can’t deduct the gifts as a business expense.
Q: My daycare parents contribute items to my yard sale. Can they claim these items as a donation on their taxes? If I spend the money on items for my business can I claim this as a business expense? Do I have to report the money I received as income?
A: Parents cannot claim a charitable deduction for items they give to you because you are not a charity. You can deduct as a business expense items you purchase from your yard sale earnings. You only have to report the money you received from the yard sale if you sold the items for more than you paid for them.
Q: How do we show that we bought things at garage sales?
A: Bring along a receipt for the homeowner to sign or write yourself a note when you get home: “Garage sale, 123 Smith Ave, $5, used highchair.”
Q: Would emails I exchanged to purchase items on CraigsList count as a record?
A: Yes. Good idea.
Q: Can I use a higher percentage for items such as copy paper than is 90% business?
A: Yes. The general rule is to use your time-space percentage for shared items. However, you can use an actual business use percent for selected items that are used heavily for your business. If you do this you must keep a record of how you determined that it was 90% business. Perhaps the easy thing to do is to track how much personal paper you used in a month to determine the business portion.
Q: Can I count the hours that children are present or the hours that I am open? Can I count hours spent on curriculum preparation, food preparation and yard maintenance? Do I need to keep a log of all the extra hours that I work?
A: Claim the hours children are present, not when you are open. In addition, you can count hours spent on business activities in your home after the children are gone. This can include curriculum preparation and food preparation. Don’t count regular household activities such as yard maintenance, taking out the garbage, and personal cleaning. Track all the hours worked after children are gone for at least two months every year and use this average for the entire year.
Q: Where does an actual business percent get entered onto the tax forms?
A: You should keep your own records that show how you calculated your actual business use percent. Don’t file them with your tax return. Enter the business portion as a deduction on Schedule C. If you get audited you will have records showing how you came up with your deduction amounts.
Q: If I mop and vacuum every night after the kids leave, can I count this time towards my time-space percentage or would it be considered personal cleaning?
A: Count it as business time. Work spent cleaning right before or right after the children are in your home counts as business time.
Q: Can I claim my time spent on shopping for day care items, attending college or other classes that are required by licensing rules?
A: You can’t count time spent away from your home, even if they were for business activities. You could count time spent at home doing homework for college classes.
Q: How long do we need to keep our receipts?
A: Three years after you file your taxes. An exception to this general rule is that you must save receipts for items you are depreciating for as long as you are depreciating them, plus three year. Since you depreciate furniture and appliances over 7 years you need to save these receipts for 10 years.
Q: I was always told to save my records for 7 years. That is wrong?
A: It’s only three years. I would save them for four years, just to be on the safe side.
Q: Many of my utility expenses are paid through automatic debit from my family checking account. Should I put a copy of my bank statement in my expense records?
A: Yes. You want to be able to show how much you paid for your utility expenses.
Q: I have parents of a child that are newly divorced. I gave them separate receipts for their taxes. One parent wants both totals because she is claiming the children as dependants. I insisted that she would have to get that information from her ex-spouse. Is this correct? Am I required to give parents an end-of-year receipt?
A: You acted correctly. You are not required to give parents an end-of-year receipt. Giving separate receipts to each parent indicating how much each parent paid is appropriate. It’s up to the parents to sort out who is entitled to claim the child care tax credit.
Q: Does dental expenses count as a deduction if I set up a medical reimbursement account (Section 125 plan)?