The IRS has re-released their webinar "Tax Related Guidance for Child Care Providers" to explain some of the unique tax rules affecting family child care providers.
The hour-long broadcast was originally broadcast in June 2012.
It covers reporting of income, record keeping tips, business use of the home calculation, depreciation and the Food Program and food expenses.
To see a copy of the power point slides, click here.
The webinar host referred the audience to the IRS Child Care Tax Center where additional IRS resources are posted.
The webinar host points out that the IRS will look for unreported income by examining a child care provider's contract for language about fess such as: late pick up fees, registration fees, transportation fees, and other fees.
In other words, providers who have such fees in their contract will be assumed to have collected these fees, even if they weren't! To protect themselves, providers who are not consistently collecting fees listed in their contract should start collecting them or take them out of their contract. See more in my Commentary to the IRS Child Care Audit Technique Guide.
The host advises providers to report only the "net" income or expenses when reporting Food Program income and expenses. Unfortunately, this advice is contradicted by the IRS Audit Child Care Provider Audit Technique Guide which says, "the netting method is not a preferred method since an [IRS] Examiner will always be looking for the food reimbursement amounts."
The IRS added this language to the Audit Guide at my request after I pointed out that using the netting method has created confusion for many child care providers and tax preparers. For further information about netting, see my article "Are CACFP Reimbursements Taxable Income?"
There were several questions posed by the audience that were answered during the webinar. Can a child care provider deduct expenses for maintaining her yard (such as a lawn mowing service)? Answer: Yes.
Can a child care provider use the standard meal allowance rate if she operates her business outside of her home? The IRS agents answering questions were not sure of the answer, but referred the audience to IRS Revenue Procedure 2003-22 which established this rate (I lobbied to get this rule adopted in 2003).
This Procedure says the standard meal allowance only applies to child care providers who do care out of their own home. However, before the standard meal allowance rule was in force, the IRS did allow child care providers to use the higher Food Program reimbursement rate (Tier I) to estimate their food expenses. Therefore, I believe that the standard meal allowance rate could be used in this situation as a reasonable estimate of food expenses.
Note: Earlier in the webinar when discussing the standard meal allowance rate, the host said, "You nee to keep records of the actual cost of the food." This is incorrect. When using the standard meal allowance rate you do not need to save any food receipts or keep track of the cost of food. You only need to track attendance records and the number of meals and snacks each child is served.
Several questions were raised about the ability of family child care providers to deduct expenses associated with their home (property tax, mortgage interest, house insurance, house repairs, utilities, and house depreciation) when the provider was not licensed. Providers can deduct these house expenses as long as they:
"...have applied for (and not have been rejected), been granted (and still have in effect), or be exempt from having a license certification, registration, or approval as a daycare center or as a family or group daycare home under state law." See the instructions to IRS Form 8829 Expenses for Business Use of Your Home.
There continues to be confusion about this point, despite the clear directions in these instructions that are repeated in IRS Publicaiton 587 Business Use of Your Home. I've had to fight on behalf of providers who were exempt from licensing requirements in several IRS audits. I've also written an article on this topic, "Do I Have to be Licensed to Deduct My House Expenses?"
It's a good thing the IRS recognizes that family child care providers face unique challenges when filing their taxes. This webinar is a helpful step.
However, I believe most family child care providers will find this webinar of limited use. The webinar was addressed primarily at new child care providers. However, they may be confused by the many references to the IRS Tax Code and the lack of practical examples that might have made the presentation more understandable. Experienced child care providers will likely not find much of interest, unless they want a review of the basics.
The host referred the audience to the many IRS publications that offer more detail on topics such as depreciation and business expenses. However, these publications are not easy to understand and usually do not refer specifically to family child care.
Tom Copeland - www.tomcopelandblog.com
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