1. Receipts.
Business expenses can only be claimed if you have a receipt. Your goal should be to have receipts for every penny of your expenses. Because most of the costs to clean, maintain, and repair your home can be partially deducted as a business expense (light bulbs, toilet paper, garbage bags, snow shovel, tools, etc.), you should remember to collect receipts whenever you go to the drugstore, hardware store, etc. Record on your calendar when you go on field trips or travel because of business. A canceled check may not be as acceptable to the IRS as a store receipt.
2. When Can Expenses be Deducted?
You must report all income from caring for children even if you do not meet or have not completed legal regulations or requirements. You should begin deducting business expenses as soon as you begin caring for your first child, even if you do not meet local regulations. The only expenses you cannot deduct if you do not meet local regulations are expenses connected with your house (utilities, insurance, taxes, interest, and depreciation).
3. Food Expenses.
Because food costs will probably be your single biggest expense, you should begin keeping careful records, including: store receipts, canceled checks, menus, and attendance records. Use your menus to calculate how much it costs to serve this food. If you cannot collect all your food receipts, do a careful accounting at least several months of the year.
4. Monthly Review.
Do not wait until the end of the year to collect your receipts and other records. Conduct a monthly review to make sure you have everything in order. Keep your records in one place. Use envelopes to store receipts by month. Make sure receipts are labelled and can be read. If you forget to get a receipt or if you could not get one (parking meter, garage sale, etc.), make one of your own to remind you of the expense.
5. Estimated Tax.
You may have to pay some federal income tax before the end of the year. To find out of you must pay estimated tax, estimate income and expenses through the end of the year. If you will owe $500 or more in taxes, you will have to pay in quarterly installments due April 15, June 15, September 15, and January 15. There are many exceptions to this rule. See IRS Publication 505, "Tax Withholding and Estimated Tax."
6. Employees.
If you hire someone as a substitute or helper in your business, you should treat this person as an employee, which means you must withhold Social Security and income taxes for the employee and pay employer's Social Security taxes throughout the year. Many providers treat helpers as independent contractors (self-employed workers) and do not withhold taxes, but this practice is not advisable. Check with a tax professional to make sure you are filing the proper tax forms throughout the year.
7. Household Inventory.
Your house and the items in your house that are used at all in your business are being worn out at a faster rate than if you were not doing family child care. As a result, you can deduct or depreciate a portion of the cost of these items as business expenses. Conduct a thorough room-by-room inventory and list every item (furniture, appliances, kitchenware, etc.) in your house (tools, lawn mower, vacuum cleaner, etc.). Consult the Tax Workbook to determine how much expense can be claimed on your tax return.
8. Year End Expenses.
Be aware that if you purchase 40% or more of capital expenses (items lasting longer than one year) during the last three months of the year, you may not get all the deductions for all of your capital expenses for that year. To avoid this "mid-quarter convention" rule, plan your purchases before October or after December. If you begin your business during the last quarter of the year, this rule will apply to you. See the Tax Workbook for more details.
9. House Improvements. You should begin depreciating a portion of your house as a business expense. The amount of house expense you can depreciate is the purchase price of your home (minus the value of the land) plus all major house improvements made before you went into business. Go back and record all your major house improvements (new roof, furnace, re-modeling, etc.). Save receipts. Get replacement receipts from contractors, if necessary. As a last resort, photograph the improvement and write down your best recollection of the cost and date it was done. Keep records of any house improvements you make after you start your business. Having records of house improvements will help reduce your taxes. Be aware that when you sell your home you may pay more tax.
10. Time/Space Percentage.
This number will probably have the greatest impact on your tax return. The Time-Space Percent is a formula used to calculate how much of your business and personal expenses (furniture, utilities, supplies, etc.) may be deducted as business expenses. For a complete description of how to calculate the Time-Space Percent and complete the new form, see the "Family Day Care Tax Workbook;" $6.95, Redleaf Press.
(This article is courtesy of Resources for Child Caring.)
From the January, 1992, issue of The Teddy Bear.
