Mastering record keeping 2011

Mastering Record Keeping and Taxes

Tom CopelandFor the National Association for Family

Child Care, July 20, 2011

1Copyright 2010 Tom Copeland and Resources for Child Caring

Instructor

• Tom Copeland, JD• Trainer on family child care business issues

since 1981• Author of 9 books on the business of family

child care• Contact me with questions: 651-280-5991;

[email protected]• www.tomcopelandblog.com

Copyright 2010 Tom Copeland and Resources for Child Caring 2

mailto:[email protected]

Welcome!

• This class will enable you to better assist providers to – Identify the benefits of good record keeping– Learn how to properly report business income– Identify common business deductions– Claim food expenses– Deduct car expenses– Properly calculate the Time-Space Percentage– Hire employees


Disclaimer

• “I am not rendering legal, tax, or other professional advice.”

• “If you require this type of assistance, please consult a professional to represent you.”


General Record Keeping Tips


Do You Love Record Keeping?

Maybe not, but …• Keeping good records means big rewards!• The better your records, the lower your taxes• For every $10 of expenses you claim, you’ll

save $3-$4 in taxes


Three-Year Rules

• Keep all business records for at least 3 years– Some states require that you keep records longer

• The IRS can audit back 3 years• You can amend your tax return back 3 years


Tracking Income


Taxable Income

• Report money received from:– Parents– Food Program– Subsidy Program– Grants


Two Key Rules

• Identify all deposits into personal/business bank accounts

• Get a signed receipt from each parent at end of year


Adequate Records

• Receipt• Cancelled Check• Credit/Debit Card Statement• Written Record (created by provider)• Photograph


Mark Receipts

• Mark items on each receipt– 100% Business– Shared

• Put into folders with other similar expenses– Toys, supplies, utilities, activity expenses, etc.


Supply Expenses

100% Business Shared

$800 + $1,000 = $1,800 x 40% = $720X 40%$400

Correct deduction for supplies $800 + $400 = $1,200


Car and Food Expenses


Car Expenses

• Claim car trips that are “primarily” for business purposes

• Keep “adequate” records of business trips– Receipts, mileage log, cancelled checks,

credit/debit cards, written records, calendar notations, photographs

• Don’t need to keep odometer readings


Standard Mileage Method

• 2011 standard mileage rate– $.51 cents per business mile 1/1/11 – 6/30/11– $.555 cents per business mile 7/1/11 – 12/31/11

• Can also deduct parking, tolls, business portion of loan interest and personal property tax on car


Actual Expenses Method

• Claim business portion of:– Gas, oil, repairs, car insurance, parking, tolls,

depreciation on the car, car loan interest, etc. • Business portion=

Business miles Total miles


Food Program

• Join the Food Program!– You are always financially better off

• Reimbursements from the Food Program are taxable income– Exception: reimbursements for your own children


Standard Meal Allowance

• All providers eligible to use this rule• Can claim up to 1 breakfast, 1 lunch, 1 supper,

and 3 snacks per day/per child• Never count meals for own children• Meals (not reimbursed by the Food Program)

do not have to be nutritious


Standard Meal Rules

• 2011 rate– $1.19 breakfast; $2.22 lunch/supper; $0.66 snackAll providers use these rates for entire year


More Standard Meal Rules

• Keep daily record of all meals and snacks served

• Use monthly Food Program claim form• Track non-reimbursed meals daily on a

calendar


Actual Food Cost Method

• Estimate your actual food costs• Many different methods to use• Must keep all food receipts - business and

personal


Claiming Deductions


Three-Step Process

1) Is it deductible?2) How much is deductible?3) When can I deduct it?


Is It Deductible?

• It is if it’s “ordinary and necessary” for the business

• Parents expect providers to offer a home environment for children to learn

• Anything to clean, maintain, and create a home environment is “ordinary and necessary”


Common Deductions• Play Room – toys, rugs, DVD player, furniture,

books, etc.• Outdoors – lawn mower, rake, fence, new house

siding, etc.• Living Room – curtains, chair, lamp, ceiling fan,

piano, etc.• Bathroom – towels, soap, toilet paper, rug,

bathroom scale, etc.• Garage/basement – tools, freezer, garbage can,

bicycles, etc.


How Much Is Deductible?

• Exclusively personal use– No deduction

• Exclusively business use– 100% business deduction

• Partly business and personal use– Use Time-Space Percentage– Could use Actual Business Use Percent


Shared Business/Personal Expenses

• You have hundreds of items used for both business and personal purposes:– Property tax, mortgage interest, utilities, house insurance,

house repairs, home improvements, house depreciation, rent, furniture, appliances, fence, supplies, toys, television, kitchen utensils, tools, etc.

• Use Time-Space Percentage to determine business portion


It Can Make A DifferenceProperty tax $5,000Mortgage interest $4,000Utilities/repairs $5,000House Insurance $3,000House depreciation $2,000Toys, supplies, etc. $1,000Total $20,000

$20,000 x 35% T/S% = $7,000 business deduction

$20,000 x 40% T/S% = $8,000 business deduction

5% higher T/S% = $1,000 extra deduction


Time-Space Percentage

• Time Percent– How many hours are you using your home for

your business?

• Space Percent– How many square feet are you using your home

for business on a regular basis?


Business Hours

• Count two types of hours:– When children are present in your home• From the moment first child arrives until last child

leaves

– When children are not present in your home and you are conducting business activities• Cleaning, activity and meal preparation, parent

interviews/calls, record keeping, Internet, etc.


Track Hours

• Hours children are present in home– Use calendar or Food Program claim form for

attendance records

• Hours children not present in home– Track 2 months of cleaning, activity preparation,

etc. and use average for rest of year


Track Additional Time At Pickup

• Parent pick-up time is 5:30 pm• One parent is regularly late and doesn’t leave

provider’s home until 6:00 pm• Provider should track when parent walks out, not

signs out• Half hour a day, 5 days a week = 1.5% of the year! – This is worth tracking: $20,000 x 1.5% = $300


Business Space

• Count rooms that are regularly used for your business

• “Regular use” means at least 2-3 times a week– Bedroom used for naps, living room, dining room, kitchen,

playroom, bathrooms, etc. • Children do not need to be in room for it to be

“regular use”– Laundry room, storage room, master bedroom, etc.


More on Business Space

• Can count rooms even if licensing says off limits for children– Laundry room in basement used by provider

• Must count basement and garage as part of home– Basement: tools, garbage can, bikes, yard equipment, etc.– Garage: storage, furnace area, workbench, etc.


Time-Space Percentage

• Hours worked divided by total hours in a year = Time Percent

• Rooms regularly used for business divided by total rooms = Space Percent

• Time Percent X Space Percent = Time-Space Percentage

• Recalculate your percentage each year


Exclusive Use Room Rule

• Allows providers to claim higher Time-Space Percentage for room used 100% for business

• Room must never be used for personal purposes!– Own children using room once a year would disqualify

• Examples: playroom, storage room, crib room


When Can I Deduct It?

• Basic Rule of Depreciation - • Item costs less than $100– Deduct in 1 year

• Item costs more than $100– Depreciate over a number of years

• $100 is a rough rule of thumb


Definition of Depreciation

Depreciation means deducting an item over a number of years– $50 toy (100% business) = $50 deduction in current year– $50 toy (shared expense) x 40% T/S% = $20 deduction in

current year– $1,000 computer (100% business) depreciated over 5

years = $200 deduction in current year ($1,000 x 20% first year depreciation)


Exceptions to Depreciation

May deduct in one year rather than depreciating -• Repairs• Section 179 rule• Item wears out before end of first year


Categories of Depreciation

• Office Equipment (5 years)– Computer, printer, fax, copier, scanner

• Personal Property (7 years)– Furniture, appliances, play equipment, carpet, vinyl flooring

• Land Improvement (15 years)– Fence, driveway, playground equipment

• Home Improvement (39 years)– Remodeling, new furnace, deck, wood/tile floor

• Home (39 years)• Car (5 years) (only if using actual business expenses method)


Home Improvements vs. Repairs

• Home improvement is attached to the home and increases its value– New roof, new deck, remodel basement room

• Repair simply maintains the value of the home– Replace damaged shingles on roof, staining the

deck, paint basement room– $5,000 house painting = repair (1 year)

• Repair (1 years) vs. improvement (39 years)!


Section 179 Rule

• This rule allows providers to deduct items in one year, rather than depreciating them

• Item must be used more than 50% in business• Rule applies to:– Office equipment, personal property, car– Not: land improvements, home improvements, home

• Item must be purchased in current year


House Depreciation

• All providers should depreciate their home, no matter what!

• $100,000 purchase price of home x 40% T/S% = $40,000/39 years = $1,025 deduction/year

• Home depreciation is a significant tax benefit


Business Inventory

• Conduct inventory of all household items• Tax benefit can be substantial– $10,000 worth of household items x 40% T/S% =

$4,000 business property/7 years = $570 deduction/year

• New providers– Start depreciating when business begins

• Experienced providers– Use Form 3115 to recapture depreciation not

previously claimed


Workers Are Employees

• A person who is hired to help care for children is an employee (with rare exceptions)– No matter how little the person is paid– No matter how few hours the person works• Many providers fail to treat their workers as

employees when they should


Federal Employee Tax Forms

• EIN – tax identification number• Form I-9 – eligibility to work in U.S.• W-4 – employee tax withholding• Form 941 or 944 – payment of payroll taxes• Form 940 – unemployment tax• W-2 – wages notification to employee• W-3 – wages notification to Social Security


Federal Minimum Wage

• $7.25 per hour• Federal minimum wage only applies if

provider hires more than one employee (not counting immediate family members)

• If state minimum wage is higher than federal minimum wage, must pay state minimum wage

• State may require state minimum wage for first employee hired


Workers’ Compensation Insurance

• Workers’ Compensation insurance covers employees who are injured on the job– State rules determine when providers must

purchase this insurance– Significant penalties for not having this insurance

when required– Contact state workers’ compensation office for

information


Hiring Family Members

• No Form I-9, no federal unemployment tax• Spouse/own child age 18 or above– Must withhold and pay Social Security tax– Spouse/own child must report income

• Spouse/own child below age 18– No Social Security tax owed– Child earning less than $5,450 does not report

income


Rules For Hiring Family Members

• Prepare detailed job description • Work must be directly related to the business

– no chores• Record hours of work, payment• Amount paid must be reasonable• Significant tax benefit to hire own child below

age 18• No requirement to pay spouse or own children


IRS Audits

• Don’t worry about being audited• Your chances of being audited: less than 2%• There is little you can do to reduce your

chances of being audited– Exception: claiming losses each year

• Claim all expenses you are entitled to and keep proper records – then don’t worry

• Get help if auditedCopyright 2010 Tom Copeland and

Resources for Child Caring 52

Business Resources

• www.nafcc.org (Business Center)– Hundreds of free articles, e-newsletter, IRS Audit

Center– Family Child Care Record Keeping Guide– Family Child Care Tax Workbook and Organizer– Family Child Care Tax Companion

• www.minutemenu.com– Minute Menu Kids Pro Record Keeping Software

program


http://www.nafcc.org/

http://www.minutemenu.com/

Pretest/Posttest Answers1) True2) False3) True4) False5) False6) False7) False8) True9) False10) False


Contact Tom

• Tom Copeland• 800-359-3817 (ex. 321)• [email protected]• www.tomcopelandblog.com• Facebook: http://tinyurl.com/6jo35ep


mailto:[email protected]

http://www.tomcopelandblog.com/