Record Keeping and Taxes

Many child care providers pay more in federal taxes than necessary, because they don’t keep careful track of their expense deductions.

Often providers think it is too much work or they don’t know what expenses are deductible.  This section will help you improve your business record-keeping practices.  This information is excerpted from the Family Child Care Record Keeping Guide by Tom Copeland, available from Redleaf Press.

Tax Preparation Help

Free tax preparation help is available to income-eligible persons through the United Way. Call 211 in the Metro Area or 1-800-543-7709 in greater Minnesota.

IRS YouTube Videos Offer Help for Taxpayers

The Internal Revenue Service offers YouTube videos that can help with information on a variety of the most frequently asked taxpayer questions. Videos are availabe in English, Spanish, and American Sign Language. The IRS also has a number of free resources that can help family child care providers file their tax return:

  • Call the IRS Business and Specialty Tax Line at 800-829-4933 with your business related questions.
  • Visit the IRS Website to download tax forms, publications, and instructions or to search for answers to your questions.
  • Visit the IRS Website to see a list of their locations—if you prefer to ask your question in person.

Tips for Choosing a Tax Preparer
If you pay someone to prepare your tax return, the IRS urges you to choose that preparer wisely. Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your return. For a full list of tips on choosing a tax preparer, go to the IRS Website and search “tips for choosing a tax preparer”.  Tom Copeland has compiled a searchable directory of tax preparers at Taking Care of Business Blog.

2017 Tax Changes

Below is a list of new tax changes that affect Family Child Care Providers:

  • Providers may deduct in one year (rather than depreciating) items they purchased in 2017 that cost less than $2,500. Providers must include the following written statement with their tax return indicating they are electing this rule:
    • “Section 1.263(a)-1(f) De Minimis Safe Harbor Election
      Your name ____________________________
      Your address __________________________
      EIN or Social Security Number ____________
      For the year ending December 31, 2017 I am electing the de minimis safe harbor under Treas. Reg. Section 1.263(a)-1(f) for my business expenses of less than $2,500.”
  • The 50% bonus depreciation rule has been extended to 2017. This rule allows providers who purchased new furniture, appliances, playground equipment, fences, patios, office equipment, and home improvement to deduct half of the normal depreciation in 2017.
  • The income limits to qualify for the IRS Saver’s Credit has increased to $61,000 (adjusted gross income) for couples filing jointly and $30,500 for individuals or married people filing separately.
  • The IRS has relaxed the rules defining what is a repair (deduct in one year) vs. a home improvement (depreciate over 39 years). Repairs may now include replacing a few windows or doors, installing a wood or tile floor and replacing roof shingles.
  • Under certain circumstances providers may be able to deduct fences/patios/driveways and home improvements in one year, rather than having to depreciate them.

Income and Expense Records

When you receive money as payment for watching someone’s children, you are running a small business.  The Internal Revenue Service (IRS) will expect you to pay taxes on the money you are paid—that is your income.  The things that you buy for use in the care of children (like toys, diaper wipes, paper towels, cleaning supplies, cribs, heat, electricity and more) are business expenses and can be deducted from your income so you won’t need to pay income taxes on the money that has been deducted.  You will pay taxes on your ” taxable income“.

Income:  the money paid to you for caring for children
Expenses:  the money you spend on things needed for your child care business
Taxable income:  the remaining money is the amount you will pay income taxes on after you subtract your expenses from your income

Start by deciding where you will record your income and expenses.  There are many choices—use what works best for you.  Every time you are paid in cash, check, or with an exchange of services (bartering), record that payment as income.  Every time you spend money for something that is used in part or completely for your child care, record that as an expense (except meals and mileage; these will be recorded differently—see below).  You can use a ledger book, Calendar Keeper, or a home-made or store bought computer program.  There are many computer programs available online that are designed especially for Family Child Care providers—one popular program is Minute Menu.

But keeping track of your income and expenses is something you must do for yourself.  Even if you decide to use a Tax Professional to file your tax return, keeping records of income and expenses is a job that only you can do!

It is a good idea to use a book or take a class to make sure you know which records to keep and what items are deductible.  But you can start by keeping records of these four things:  Attendance, Income, Expenses, and Hours Worked.  We can look at each of these categories in more detail below.


Attendance Records

Of all the records that family child care providers must keep, tracking the attendance of the children in their care may be the most important.  The best way to document children’s attendance is to have the parents sign in when they drop off their child and sign out when they pick up.

Keeping daily sign in and sign out records can make a very big difference. If the IRS audits a family child care provider’s food expenses, the auditor will be looking for evidence that the provider served each meal and snack that was claimed. Auditors may also be suspicious of providers who show perfect attendance records on Food Program claim forms. Therefore, providers may want to keep such daily sign in and sign out records so as not to be second-guessed.

A sign-in form will also help with:

  • Time/Space percentage (you can use it to calculate the time you are open)
  • Food program—it helps to validate your claims if they are questioned
  • Safety—it can be helpful to keep track of children who have fluctuating schedules
  • Contract issues—it can be helpful when enforcing late fees

The Calendar Keeper, from Redleaf Press, has attendance pages for each month of the year.

Income

This includes cash payments, checks, Child Care Assistance payments, Food Program income, and grants or gifts.  If you barter for services, the value of those services should be counted as income, as well.

Expenses

For every $100 of expenses you deduct, you will save $20 – $40 in taxes.  So it is important to keep receipts for anything you purchase that is used even partly for your child care.  Items that are used for both your home/family and child care are “shared expenses”.  You are entitled to deduct all expenses that are “ordinary and necessary” for your business.  This includes hundreds and hundreds of items around your home, such as house expenses: property tax, mortgage interest, utilities, cable TV, house insurance, house repairs, house depreciation, fence, garage, rent (for renters), etc.; items for the children: food, arts and crafts supplies, toys, outdoor play equipment, children’s books and magazines, movie rentals, CDs, diapers, field trip expenses, etc.; household items: light bulbs, toilet paper, paper towels, cleaning supplies, carpet cleaning, lawn maintenance service, kitchen supplies, fire extinguisher, household tools, yard supplies, lawn mower, laundry detergent, etc.; furniture and appliances: sofa, chairs, beds, bookshelves, TV, DVD player, washer, dryer, tables, rugs, freezer, refrigerator, microwave, rocker, stroller, etc.; other expenses: advertising, car expenses (including car loan interest), business liability insurance, training workshops, computer, business books, etc.  special expenses: food (meals for children) and mileage.  More on these special expenses below.

Standard Meal Allowance Rates

The Standard Meal Allowance Rates are the amounts that all providers can use each year to deduct food expenses on their tax return. These rates can be used by all providers, whether or not they are on the Food Program. Use these rates for meals and snacks served for the entire calendar year. Although the Child and Adult Care Food Program (CACFP) Rates go up every July, for tax deduction purposes, providers must continue to use the Standard Meal Allowance rate that was in effect in January for all meals served for the year. Providers can deduct the cost of up to one breakfast, one lunch, one supper, and three snacks per day per child, if they serve them at the rates below.

Tier I – All states exept AK and HI    Tier II – All states except AK and HI

Breakfast $1.31                                                      Breakfast $.48

Lunch/supper $2.46                                            Lunch/supper $1.49

Snack $.73                                                              Snack $.20

 

Standard Mileage Rate

The standard mileage rate for all of 2017 is 53.5 cents per mile driven for business purposes.
Provider may use the standard mileage rate for all trips in which the “primary purpose” of the trip is business related. This includes trips to the bank to deposit client money, trips to the grocery store (where you purchase more business food than personal food), field trips, trips to garage sales, etc.

Providers should keep careful records of all business trips taken. Such records may include: receipts, cancelled checks, credit card statements, calendar notations, training certificates, and other written records. You are not required to keep odometer readings of each trip, but keeping a mileage log book in your car is probably the simplest way to record this information.

Providers who use the standard mileage rate may also claim the business portion of car loan interest and car property tax (as shown on your license registration statement each year). The business use percent is determined by dividing the total number of miles the car is driven by the number of business miles driven. Therefore, providers should record the odometer reading of their car at the beginning and ending of each year.

Instead of using the standard mileage rate, providers may choose to use an actual business expenses method. If you use this method, you can total all the actual expenses for operating the car (gas, oil, repairs, insurance, depreciation, etc.) and multiply by your business use percent. Providers who use this method must keep all receipts for these expenses.

Hours Worked

Hours worked include both “Hours Open” and “Other Hours Worked”.  Keep track of both.  You can use your attendance records to calculate the hours your business is open. The time from when the first child arrives at your door in the morning until the last child leaves for the day are the hours your business is open.  Other hours worked include the daycare-related chores you do when there are no children present at your home.  These include cleaning, cooking, preparing for crafts, interviewing potential clients, taking an online class, or any other daycare-related work you do at home.  You can keep track of this extra work for 2 months each year and use that as an average for the rest of the year.  Add together the “Hours Open” and “Other Hours Worked” to get the “Time” for your time/space percentage.  You will give this number to your tax preparer, or if you do your own taxes and need to learn more about the time/space percentage, consult the Family Child Care Tax Workbook and Organizer by Tom Copeland, published by Redleaf Press.