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.