Tax Tips for In-Home Daycare

Tax Tips for In-Home Daycare Providers

You have made the decision to take on one of the most challenging activities—becoming a daycare provider. Whether you care for one child, or several, it’s important to keep in mind that you are operating a business and you should keep accurate income and expense records. You can operate your business as a sole proprietorship, partnership, corporation, or limited liability company (LLC).

Before you begin operating as a daycare provider, you must investigate the licensing requirements. Not all states require licensing or registration of daycare providers. Some states will require that you obtain a license if you care for a certain number of children. You must contact your state licensing authority and find out whether they require you to have a license. Whether they do or not, your business deductions are the same.

All the fees you collect for providing daycare services are reported as taxable income. If you are operating your business as a sole proprietor or partnership, the IRS also requires you to pay self-employment tax on your income. If you operate your business as a corporation, you are an employee of that corporation and should pay yourself a reasonable wage for the services you provide.

There are several different types of expenses that relate to a daycare business that are deductible. Keep in mind that the IRS allows you to deduct all ordinary and necessary expenses incurred in conducting this activity. Some of the more common expenses are:

• Advertising
• Insurance
• Office supplies
• Legal and professional fees
• Licensing or registration fees
• Toys
• Clothing
• Diapers
• Automobile expenses. You may either deduct your actual expenses for operating your vehicle for business purposes, or you may use the standard mileage rate. For 2007, the standard mileage rate is 48.5 cents per mile. The rate increases to 50.5 cents per mile in 2008.
• Education and training expenses to maintain or improve your skills
• Special equipment such as highchairs, cribs, strollers, first aid kits, etc.
• Food – either actual costs of the meals you provide or a standard rate (see table)

2007 2008

Breakfast $1.06 $1.11

Lunch/Dinner $1.97 $2.06

Snack $0.58 $0.61

As a daycare provider, you may be eligible to participate in a food program administered by the Department of Agriculture. These reimbursements are taxable to the extent they exceed your food costs. If your food costs are more than your reimbursements, the difference is a deductible expense. As with all expenses, if you are reimbursed, you must reduce your deductible costs by the reimbursement.

Your customers may ask you to provide them with your social security number or, if you have employees, your federal employer identification number. This will enable them to claim the child and dependent care credit on their tax return for the amounts they pay you. They should provide you with Form W-10, Dependent Care Provider’s Identification and Certification, for you to complete.

As with any small business, keeping accurate records is a must. Maintaining your income and expenses on a monthly basis will make filing your tax return easier once tax time arrives.

IF YOU SELL IT ON EBAY YOU HAVE TO PAY THE IRS

Sell It on eBay and Pay Uncle Sam

Many people don’t realize the income they earn from auctions and consignment sales may be taxable. If you regularly sell items you own, you might be considered a business owner and not even know it. Are you reporting all your income? The Internal Revenue Service (IRS) wants to know.

All income from auctions, traditional or online (such as eBay and Craig list), and consignment sales is generally taxable unless certain exceptions are met. This income is usually considered either “business” or “ordinary” income. In certain circumstances such income can qualify for the more favorable capital gain treatment. There are also some exceptions where income can be excluded from taxable income.

Business income resulting from an auction or consignment sale is subject to the same taxes as the income of any other retail or service business. That may include income tax, self-employment tax, employment tax, or excise tax. A retail or service business owner must include this income in his or her business income.

A person must report a gain from a sale whether he or she operates a business or not. A reportable gain is the income above the original cost or basis of the item. These gains may be business income or capital gains.

Generally, you are not required to report income resulting from a garage or yard sale. Why? Because the items you sell are usually sold for far less than what you paid for them. If you hold an occasional garage sale, you are not operating a business, so any loss you have is not deductible. However, there may be exceptions. If an online garage sale turns into a business with recurring sales and purchases of items for resale, it may be considered an online auction business.

An occasional sale of an item that has appreciated in value, such as antiques and collectibles may result in a capital gain. If you sell such items, the taxable gain is the excess of the selling price over your cost. This type of income is eligible for the lower capital gain tax rates.

What’s a deductible expense? Traditional or online auction and consignment sellers in business to make a profit can generally deduct expenses that are both ordinary and necessary. An “ordinary” expense is one that is common and accepted in a trade or business. A “necessary” expense is one that is helpful and appropriate for a trade or business. Verifiable auction and consignment fees and commissions are examples of allowable business expenses.

Expenses related to personal, living, or family matters are generally not deductible. These are expenses that are part personal and part business-related. The business portion of the expense is deductible. Here’s a simple example. A person might borrow $10,000, using $7,000 for personal use and $3,000 for his or her online auction business. The interest expense on the $7,000 is not deductible but the interest on the other $3,000 is.

Another example of an expense that is commonly split when figuring tax deductions is a person’s home when it is partially used for business. That person may be able to deduct expenses for the business use of the home if they meet the regular and exclusive use requirement. However, auction and consignment sellers may compute their deduction to the extent of expenses allocable to space in the residence that is used on a regular basis (does not have to be exclusive) to store inventory and/or product samples if the residence is the sole fixed location of the business. Allocable expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.

Remember, whether you are operating a business or not, the profits you earn are taxable and the government wants its fair share.

Tax Stimulus Rebate * Refund Check Is In The Mail * Get Money Back

Tax Stimulus Rebate – the Check is in the Mail

Welcome to FARROW & ASSOCIATES LLC. We help Wisconsin Businesses and their owners obtain and sustain a high level of success.

By now many of you have received a notice from the IRS telling you that you will be receiving a stimulus rebate check sometime this summer. That’s right; the government will be sending you money instead of the other way around. There are only a few catches.

First, to qualify for the rebate, you have to file a tax return. The amount you receive will depend on the information you report on your 2007 tax return. If you are not required to file a return, do it anyway. The earlier you file your return, the sooner your rebate check will arrive.

Second, you must have at least $3,000 in qualifying income. Qualifying income is defined as any combination of earned income (such as wages or taxable income from self-employment), nontaxable combat pay and certain benefits from Social Security, Veterans Affairs and Railroad Retirement.

Unfortunately, if you are eligible to be claimed as a dependent on another person’s return in 2007, you are not eligible for a rebate check. The good news is that if you are not eligible for a rebate check this summer, you may qualify for an additional tax credit when you file your 2008 return. This is because the rebate check is really an advance credit against your 2008 tax liability. For example, if your income was too high in 2007 to qualify for the rebate, you may be allowed to claim a tax credit (up to $600 or $1,200 for joint filers) if your 2008 income is lower. Also, if you were claimed as a dependent in 2007 and won’t be in 2008, you will get the credit on your 2008 tax return.

A common misconception about the rebate check is that the amount you receive this year will be taxable next year. This is not the case. The payment will not reduce your 2008 refund, nor become taxable when you file next year.

If you are curious about whether you qualify for the rebate, the IRS made available and online calculator on their website at www.irs.gov help you determine if you are eligible to receive an economic stimulus payment and if you are, how much you can expect. Anyone who has prepared a 2007 income tax return can use the calculator. It will ask you a series of questions, so you should have your 2007 tax returns handy. After answering the questions, the calculator will provide the projected dollar value of the payment.

Stimulus payments will be sent out in beginning May 2 based on the last two digits of the social security number used on the tax return. On a jointly filed return, the first social security number listed will determine the mail-out time. Because the IRS will use the social security number to determine when checks are mailed, taxpayers may receive their checks at different times than your neighbors or other family members. So sit back and relax, the check is in the mail.

If you have any questions please visit our web site Farrow & Associates

STIMULUS PAYMENTS - CPA NEWS - TAX INCOME CREDIT

STIMULUS PAYMENTS --- Farrow & Associates

In an effort to energize the nation’s economy, the Economic Stimulus Act of 2008 was recently approved, setting forth a plan for more than 130 million Americans to begin receiving rebate checks as early as May.

• The taxpayer has a net income tax liability. They will receive up to a maximum of $600

($1,200 for a joint return); or

• The taxpayer has at least $3,000 of qualifying income. Qualifying income includes:

o Earned income,

o Veteran’s disability payments (including payments to survivors), and

o Social security benefits.

Taxpayers who receive at least $1 of the rebate will receive an additional $300 for each qualifying child. A qualifying child is generally a dependent who is under age 17 at the end of the year.

Rebates begin to phase out at $75,000 of adjusted gross income (AGI) for individuals and $150,000 of AGI for married couples filing jointly. The rebates phase out at five percent of the amount exceeding the applicable AGI threshold.

How do seniors collect the rebate?

Seniors with at least $3,000 in qualifying income will be eligible to receive a rebate, but they do need to file a return. Seniors should do the following:

• Report income including Social Security benefits, veteran’s disability payments, and railroad retirement benefits, on

o Line 20a on Form 1040, or

o Line 14a on Form 1040A

• Fill out name, address and Social Security number on the form and write the words “Stimulus Payment” on the top of the form.

• Mail to IRS address provided on form.

Seniors who have already filed a tax return reporting less than $3,000 qualifying income may want to file an amended return if they are now eligible because of the additional qualifying income that comes with this rebate program.

Frequently Asked Questions

Q. Is my stimulus payment taxable?

A. No, You will not owe tax on your payment when you file your 2008 federal income tax return. The IRS will be sending you a letter later this year listing the amount you received. In the event that you did not qualify for the full amount this year, but you do next, that form will be your record of the amount you previously received.

Q. Will the payment I receive in 2008 reduce my 2008 refund or increase the amount I owe for 2008?

A. No, the stimulus payment will not reduce or increase the amount you owe when you file your 2008 return.

Q. Can I have my stimulus payment direct deposited?

A. If you elected to have your 2007 tax refunds direct deposited, then the stimulus payment will be sent to the same account. If you’re not receiving a refund, but will be eligible for the rebate, the IRS suggests that you put your bank routing information on the form so you will receive your rebate more quickly.

Q. If I owe back child support, will the IRS withhold my rebate?

A. Yes, if there is any amount remaining after the back child support is paid, it will be sent to you.

Q. I claim my elderly parents as dependents. Are they still eligible to receive the stimulus rebate?

A. No, because they are your dependents, they are not eligible for this rebate.

For the most accurate information regarding the 2008 Stimulus Act, contact a tax preparer in your community today. Professional tax preparers are experts who keep current on tax law changes.

Remember to visits Farrow & Associates

Top Ten Credits -- Deductions That May Save You Tax Dollars

As our parents used to tell us when we were young, “Every little bit helps.” Of course, they were referring to putting money in the piggy bank, but the sage advice can also apply to saving money on your tax returns. Here is a quick list of tax credits and deductions to check out before sending in your tax return so you don’t miss any opportunities to save.

1) Earned Income Tax Credit (EITC) – This credit applies to low-income, employed individuals and families. The credit is based on income and family size, and if the EITC amount exceeds the owed amount, it may result in a refund for those who qualify.

2) Child and Dependent Care Credit – This credit is for care expenses for children under age 13 or for a disabled spouse or dependent, so that a taxpayer can go to work. It is subject to limitations.

3) Child Tax Credit – The maximum amount of this credit is $1,000 for each qualifying child under age 17 and can be used in combination with the Child and Dependent Care Credit.

4) Adoption Credit – If you are an adoptive parent, you may be eligible for a credit of up to $11,390 in 2007 of qualifying expenses for a qualifying child. For special needs children, you do not need to meet the qualifying expense criteria.

5) Educator Expense Deduction – Those who are employed as educators through grade 12 and teach at least 900 hours in a year may receive a deduction for up to $250 for unreimbursed expenses used for the sake of the children. This deduction is only good until December 31, 2007.

6) Education Credits – Two credits are available for those who pay higher education costs – the Hope Credit and the Lifetime Learning Credit. The Hope is for payment of the first two years of tuition for eligible students you claim on your tax return, and Lifetime Learning is for all post-secondary education tuition for an unlimited number of years. Taxpayers cannot claim both credits for the same student in one tax year, and the credit can be claimed only on the return declaring the student as a dependent.

7) Medical and Dental Deductions – Qualified expenses for all of your claimed dependents (including any dependents deceased during the tax year) count toward your eligible deduction. Eligible expenses include insurance premiums, uninsured medical expenses, treatments not covered by insurance, travel for medical care, medically necessary equipment, and more.

8) Health Coverage Tax Credit – This new tax credit can pay up to two-thirds of health plan premiums for individuals who lost their jobs due to the effects of international trade and meet certain criteria, and those who receive benefits from the Pension Benefit Guaranty Corporation (PBGC) and are at least 55 years old.

9) Credit for the Elderly and Disabled – If you are a U.S. citizen or resident age 65 or older, and retired on permanent and total disability, look into this credit.

10) Retirement Savings Contribution Credit – For those with qualified retirement savings contributions including traditional IRAs, Roth IRAs, SEPs, or SIMPLE plans, a percentage of contributions may help you save on your taxes. Taxpayers who are at least age 18 at year-end, not a student or claimed on someone else’s tax return as a dependent, are eligible for this credit if income is below a specified amount. FYI, you can still contribute to an IRA for 2007 up until April 15, 2008.

If all of these credits and deductions have you scratching your head in confusion, don’t worry. A reputable tax preparer can help, often for little more than the cost of do-it-yourself tax software and the charge for e-filing, plus you don’t have to do the work! Professional tax preparers are experts who keep up-to-date year-round on tax law changes. They can save you time and offer insight on how to use the tax breaks available to save you money.

If you have more questions please visit Farrow & Associates

MILWAUKEE TAX ACCOUNTANTS * TAX SPECIALIST

Welcome to FARROW & ASSOCIATES LLC. We help small Wisconsin Businesses and their owners obtain and sustain a high level of success.

We have been serving Menomonee Falls, Milwaukee, and all of Wisconsin for over 25 years. We pride ourselves on providing accounting to Wisconsin business owners.

We provide a library of financial calculators to help you begin planning your financial future-from forecasting your retirement options or child's college fund to estate planning and mortgage refinancing. Interactive calculations, dynamic graphs, and fully customizable reports are just a few features provided with our calculators to support thorough financial planning and a sound decision-making process. Though not a substitute for advice and information provided by a qualified professional, our calculators offer a good starting point to a secure future.

Refinance Breakeven	Should you refinance your mortgage? Use this calculator to determine when you will breakeven!
Amortizing Loan Calculator	Enter your desired payment - and let us calculate your loan amount. Or, enter in the loan amount and we will calculate your monthly payment!
Retirement Planner	Quickly determine if your retirement plan is on track - and learn how to keep it there.
Social Security Benefits	Use this calculator to estimate your Social Security benefits.
College Savings	Use this calculator to help develop or fine tune your education savings plan.
Savings Goals	What will it take to reach your savings goal? This financial calculator helps you find out.
Life Insurance Calculator	How much life insurance do you really need? Find out here!
Roth vs. Traditional IRA	Use this calculator to determine which IRA is right for you.
Net to Gross Paycheck Calculator	This calculator helps you determine the gross paycheck needed to provide a required net amount.
Mortgage Calculator	This calculator will show the total interest and total payment of your mortgage based on the loan amount, term and interest rate entered.

Farrow & Associates, LLC

Wisconsin Accounting, Bookkeeping and Tax Professionals

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Menomonee Falls, Wisconsin 53051

262-251-5661