Showing posts with label tax tips. Show all posts
Showing posts with label tax tips. Show all posts
Monday, March 31, 2008
Tax Tip Number Six
Hi Everyone! Time for the next tax tip! This week's tip involves record keeping. One of the most important things you need to keep track of as a daycare provider is the income you earn. This not only affects your taxes, ubt it also affects the taxes of your daycare parents. As a licensed child care provider, you are supposed to keep a sign-in/sign-out book for your child care business. As the parents drop off their child each day they sign the child in, including the time of drop off. When they pick up their child each day, they sign the child out, including time of pick up. It is really important to have the parents put the times for drop off and pick up for two reasons. First of all it useful for you when calculating either how much they owe you or how much you made that year. Secondly, it is helpful if there is a dispute between you and the parent regarding how much is owed or whether a child attended care that day. Having said all of this, I strongly urge you to keep an additional log of hours and income. There are three reasons this is a good idea. First, you can compare the sign in book with your other record to make sure they both agree. Second, you have double records to show parents in case of a dispute. Third, you have double book keeping to show the IRS in case of an audit. My suggestion is to keep a calendar handy. I always kept one hanging on the refrigerator, but you can use a pocket calendar or a wall calendar. As parents drop off each day, take a second (that is all it will take) to put down the drop off time. Do the same thing as parents pick up each day. Then if there are discrepancies between the sign in book and your records, you will be sure that your calendar is accurate and should go by that. Finally, I recommend giving parents a receipt each time they pay you. I used a generic carbon receipt book (available almost anywhere)which gave me a copy to keep and a copy for parents. Most of my parents admitted that they threw away their receipts since I gave them tax records for the year, but I gave me one more way to keep track of my income. So I always had three ways to triple check my figures for my income for the year. It was also a great way to keep track of figures for families that may quit care before the end of the year. You will always be able to go back and check these record keeping devices for accurate tax figures. Happy record keeping!
Thursday, March 20, 2008
Tax Tip Number Five
Here is this week's tax tip! With the economic stimulus act that Congress has passed, there is a tax break in sight for small business owners that need to purchase equipment in 2008. For the 2008 year ONLY, all business equipment that will be purchased this year that will be a depreciable expense on your 2008 taxes will receive an ADDITIONAL 50% in depreciation! This means that you could save money on next year's taxes by purchasing equipment this year! Now, what kinds of equipment are we talking about. Well, any large ticket items that you purchase for your business will qualify. For example, computers, swingsets, large play equipment, new refrigerators or other appliances, more expensive lawn or yard care equipment, etc. These items are all used to benefit your home daycare and can be depreciable items on your 2008 taxes. So buy them and put them into use in 2008 and you might save money on next years taxes! For more information on financing options for more expensive pieces of equipment ($5000 or more) for business owners, visit my blog http://ezrbusinesssolutions.blogspot.com
Thursday, March 13, 2008
Tax Tip Number Four
Tax Tip Number Four
It's time for the next tax tip! This week's tip is about keeping a mileage log. If you haven't already started doing this...start now! As a daycare provider mileage was one of my largest tax deductions. Even if you don't take the children you care for anywhere, you still have plenty of mileage you can claim! How do you set up a mileage log? It's simple really. First, find a notebook and pen that you can keep in your car at all times. Make sure it is something small enough not to get in the way, but large enough to hold the info. You will want to make columns for the following items in your notebook: date, starting location, starting mileage (find this on your odometer), location travelled to, reason for travelling, ending mileage. If you don't want to keep track of starting and ending mileage, just set your trip odometer to zero before you start out and record the number of miles travelled. Remember to do this before you ever pull out of the driveway and as soon as you have reached your destination. Also, remember that you can count the mileage there and back, so double your mileage for each trip. Also, keep a record if you travel from one destination to another in a single trip. For example, if you leave home, travel to the bank, and then travel to the grocery store before going back home, you will need to calculate the mileage for all legs of your trip. Now, where can you travel and count the mileage as a business expense? Of course you can count any mileage travelled while daycare children are in the car. But you can also count mileage when you go to buy groceries for child care, supplies for your business, to deposit checks from parents, errands for your business, etc. You also can count any mileage travelled to either drop off or pick up daycare children from school or other locations. This may not seem like a lot, but it adds up quickly! For even more information on other deductions for home-based business owners, see this great guide! Click Here!
It's time for the next tax tip! This week's tip is about keeping a mileage log. If you haven't already started doing this...start now! As a daycare provider mileage was one of my largest tax deductions. Even if you don't take the children you care for anywhere, you still have plenty of mileage you can claim! How do you set up a mileage log? It's simple really. First, find a notebook and pen that you can keep in your car at all times. Make sure it is something small enough not to get in the way, but large enough to hold the info. You will want to make columns for the following items in your notebook: date, starting location, starting mileage (find this on your odometer), location travelled to, reason for travelling, ending mileage. If you don't want to keep track of starting and ending mileage, just set your trip odometer to zero before you start out and record the number of miles travelled. Remember to do this before you ever pull out of the driveway and as soon as you have reached your destination. Also, remember that you can count the mileage there and back, so double your mileage for each trip. Also, keep a record if you travel from one destination to another in a single trip. For example, if you leave home, travel to the bank, and then travel to the grocery store before going back home, you will need to calculate the mileage for all legs of your trip. Now, where can you travel and count the mileage as a business expense? Of course you can count any mileage travelled while daycare children are in the car. But you can also count mileage when you go to buy groceries for child care, supplies for your business, to deposit checks from parents, errands for your business, etc. You also can count any mileage travelled to either drop off or pick up daycare children from school or other locations. This may not seem like a lot, but it adds up quickly! For even more information on other deductions for home-based business owners, see this great guide! Click Here!
Tuesday, March 11, 2008
10 Tax Deductions Home Daycare Providers Miss
Most child care providers know they can deduct the cost of food and supplies for their business on their taxes. Some even know they can take a substantial mileage deduction. But many home daycare providers miss some large deductions that can really help trim your tax bill or increase your refund. This article deals with ten commonly missed deductions and how to apply them to your taxes.
I am sure you have diligently kept your receipts from last year and have added up your food costs. Did you also calculate the cost of your consumable supplies? Maybe not! Consumable supplies are the items used for your business that are, well, consumed and have to be purchased over and over again. Items like toilet paper, tissues, napkins, paper towels, dish soap, laundry soap, etc. fall into this category. All of these items are either used by the children in your care or are used more frequently because you have children in your care. And all of them are partially deductible on your taxes. If you buy these supplies strictly for child care and your family doesn’t use them, then these supplies are 100% deductible. However, most of us don’t separate out our toilet paper for daycare and family use. So, in order to find out how much you can deduct for these consumables, you need to apply the time/space formula to the total amount spent on these supplies in a year. The time/space formula calculates how much time you spent doing daycare in a year compared to the number of hours in a year, and also calculates the amount of space in your home that you use for your business. For a full description of the time/space formula, see my article “Important Tax Deductions for Home Daycare and Child Care Providers” on www.ezinearticles.com. Briefly, you need to calculate the number of hours you spent doing child care in a year. Then you need to divide that number by the number of actual hours in a year (8760) to come up with a percentage of time you spent providing child care in the year. Finally, you need to calculate the percentage of your home that you use for your business and multiply this percentage times the percentage of hours worked to get a final percentage. This final percentage is then multiplied by the amount spent on consumables in a year to come up with the dollar figure of how much you can claim as a business expense on the consumables you purchased. Here is a list of the most common consumables used, though you may come up with a lot of others depending on your situation: dish soap, laundry detergent, dryer sheets, all cleaning products, Ziploc bags, aluminum foil, Saran wrap, garbage bags, tissues, toilet paper, paper towels, baby wipes, hand soap, lotion, paper plates, paper cups, and air fresheners. There are many others that may apply to your home. Try to come up with an exhaustive list that applies to your situation.
This next grouping of deductions I will deal with together, as they are all related. These deductions deal with supplies and services for your home that you pay for. This includes utilities, garbage services, internet service, and more. Since these services benefit both your business and your family, they once again need to have the time/space formula applied to them in order to calculate your deduction. Use the figure that you calculated from above and multiply it times the total amount paid in a year for, say, your electric bills to come up with a deductible amount. Basically, any supply or service that is used to benefit your business can be at least partially deducted. Remember to include these items: electric bills, propane or natural gas, water bills, home security system fees, cable or satellite television, internet service (if you use the internet for your business for advertising or looking things up or email), and garbage and/or recycling pickup. All of these services are necessary for running a child care business and are therefore deductible. Just calculate the total amount spent in a year for a service and then multiply it by your time/space formula calculation to get a total deduction. List these out and give them to your accountant, it’s that easy!
There are occasionally times when you can deduct 100% of the cost of a service. This applies when a service is used exclusively for your business. For example, if you have a phone line that is only used for your child care business, then you can deduct 100% of the fees for that phone line. Also, if your child care is run out of a separate building from your home, say a converted garage, then you can probably figure out the electricity for just that building and deduct that cost at 100%. It is, of course, advantageous to be able to increase your deductions, so take advantage of this if you can.
The tenth and final deduction that is commonly missed is a deduction for work done on or services provided for your home. For example, did you have new gutters installed? That cost will be at least partially deductible. Did you have your carpets cleaned? Again, that is a deduction. Did you have a repairman come to fix the refrigerator? Take a deduction for that! Save all receipts for any work done so you can claim the deduction. You will need to speak with your accountant about how much you can deduct for services done, because it depends on the service how the deduction is taken. Things like refrigerator repair will probably be deducted based on the time/space formula. Carpet cleaning and other cleaning services may be 100% deductible. Things like home improvements may have the time/space formula applied or they may be depreciated, depending on the cost. These can be great deductions, it is just a little more difficult to know how to calculate the total deduction on these items and should probably be done with the help of an accountant.
These ten tax deductions are fairly simple to apply and can really bring a home daycare provider some much needed tax relief. It takes a little extra time to calculate these items, but it can definitely be worth it in the long run!
If you are doing your own taxes, or even if you are having an accountant do them for you, it is important to know which deductions you can take. For even more information on tax deductions for home-based businesses, check out this fantasic guide - it is well worth the money! Click Here!
I am sure you have diligently kept your receipts from last year and have added up your food costs. Did you also calculate the cost of your consumable supplies? Maybe not! Consumable supplies are the items used for your business that are, well, consumed and have to be purchased over and over again. Items like toilet paper, tissues, napkins, paper towels, dish soap, laundry soap, etc. fall into this category. All of these items are either used by the children in your care or are used more frequently because you have children in your care. And all of them are partially deductible on your taxes. If you buy these supplies strictly for child care and your family doesn’t use them, then these supplies are 100% deductible. However, most of us don’t separate out our toilet paper for daycare and family use. So, in order to find out how much you can deduct for these consumables, you need to apply the time/space formula to the total amount spent on these supplies in a year. The time/space formula calculates how much time you spent doing daycare in a year compared to the number of hours in a year, and also calculates the amount of space in your home that you use for your business. For a full description of the time/space formula, see my article “Important Tax Deductions for Home Daycare and Child Care Providers” on www.ezinearticles.com. Briefly, you need to calculate the number of hours you spent doing child care in a year. Then you need to divide that number by the number of actual hours in a year (8760) to come up with a percentage of time you spent providing child care in the year. Finally, you need to calculate the percentage of your home that you use for your business and multiply this percentage times the percentage of hours worked to get a final percentage. This final percentage is then multiplied by the amount spent on consumables in a year to come up with the dollar figure of how much you can claim as a business expense on the consumables you purchased. Here is a list of the most common consumables used, though you may come up with a lot of others depending on your situation: dish soap, laundry detergent, dryer sheets, all cleaning products, Ziploc bags, aluminum foil, Saran wrap, garbage bags, tissues, toilet paper, paper towels, baby wipes, hand soap, lotion, paper plates, paper cups, and air fresheners. There are many others that may apply to your home. Try to come up with an exhaustive list that applies to your situation.
This next grouping of deductions I will deal with together, as they are all related. These deductions deal with supplies and services for your home that you pay for. This includes utilities, garbage services, internet service, and more. Since these services benefit both your business and your family, they once again need to have the time/space formula applied to them in order to calculate your deduction. Use the figure that you calculated from above and multiply it times the total amount paid in a year for, say, your electric bills to come up with a deductible amount. Basically, any supply or service that is used to benefit your business can be at least partially deducted. Remember to include these items: electric bills, propane or natural gas, water bills, home security system fees, cable or satellite television, internet service (if you use the internet for your business for advertising or looking things up or email), and garbage and/or recycling pickup. All of these services are necessary for running a child care business and are therefore deductible. Just calculate the total amount spent in a year for a service and then multiply it by your time/space formula calculation to get a total deduction. List these out and give them to your accountant, it’s that easy!
There are occasionally times when you can deduct 100% of the cost of a service. This applies when a service is used exclusively for your business. For example, if you have a phone line that is only used for your child care business, then you can deduct 100% of the fees for that phone line. Also, if your child care is run out of a separate building from your home, say a converted garage, then you can probably figure out the electricity for just that building and deduct that cost at 100%. It is, of course, advantageous to be able to increase your deductions, so take advantage of this if you can.
The tenth and final deduction that is commonly missed is a deduction for work done on or services provided for your home. For example, did you have new gutters installed? That cost will be at least partially deductible. Did you have your carpets cleaned? Again, that is a deduction. Did you have a repairman come to fix the refrigerator? Take a deduction for that! Save all receipts for any work done so you can claim the deduction. You will need to speak with your accountant about how much you can deduct for services done, because it depends on the service how the deduction is taken. Things like refrigerator repair will probably be deducted based on the time/space formula. Carpet cleaning and other cleaning services may be 100% deductible. Things like home improvements may have the time/space formula applied or they may be depreciated, depending on the cost. These can be great deductions, it is just a little more difficult to know how to calculate the total deduction on these items and should probably be done with the help of an accountant.
These ten tax deductions are fairly simple to apply and can really bring a home daycare provider some much needed tax relief. It takes a little extra time to calculate these items, but it can definitely be worth it in the long run!
If you are doing your own taxes, or even if you are having an accountant do them for you, it is important to know which deductions you can take. For even more information on tax deductions for home-based businesses, check out this fantasic guide - it is well worth the money! Click Here!
Thursday, March 6, 2008
Tax Tip Number Three
Hello again! It is time for this week's tax tip for child care providers! I hope these tax tips have been helpful to you! This week I want to address business expenses, specifically expenses related to running a business out of your home. As a daycare provider you probably use a significant portion of your home in some way to support your child care business. Because of that you have a lot of deductions you can take on your business taxes that you may not have thought about. For examples, did you know that you can deduct a portion of your electric bills? Since a portion of your electricity is used to support your business, you can claim this portion as a business expense. You will need to apply the time/space formula to your total electric bill for the entire year in order to find out what percentage you can claim as a business expense. For more information on the time/space formula scroll down to my article regarding important tax deductions for child care providers. You can also deduct a portion of your natural gas or propane bills (or whatever you use to heat your house), your cable TV or satellite TV bills, your garbage service and/or recycling bills, and services performed on your home. All of these would again have to have the time/space formula applied to them in order to find out how much you can claim as a business expense. Also, if you use yor computer for child care, specifically your internet service, a portion of your internet service provider fees is also deductible. All of these expenses are increased because you have extra people in your home for child care, so all of these expenses can be partially deducted for your business. If you have a phone line that is specifically used for your business, that expense is 100% deductible. Take the time to gather some information on your utility bills, etc. and apply the time/space formula to them. Then pass that information along to your accountant. These savings can really add up! For more information on tax savings for small businesses, check out this great info! Click Here!
Tuesday, February 26, 2008
Important Tax Deductions for Home Daycare and Child Care Providers
Important Tax Deductions for Home Daycare and Child Care Providers
It’s tax time – are you ready? Chances are, if you started a home based child care business in 2007 you are feeling very overwhelmed about your taxes. I know that feeling! I ran a home daycare for nine years and tax season can be intimidating! Whether you are having a professional complete your taxes or you are doing them yourself, there are several things you need to know to help the process go more smoothly.
First let’s talk about the issue of professional tax preparers versus doing it yourself. Which method is better? I personally have used both methods. The first year I needed to file taxes for my home child care business, I attended a workshop put on by a local community college that dealt specifically with taxes for child care businesses. It was extremely helpful. I would suggest asking around to find out if there is something like that available in your area. You can check with other daycare providers, local community colleges, or child care organizations to see if someone can point you in the right direction. After attending the seminar, I decided to do the taxes myself that first year. I felt like I had a pretty good handle on the situation and professional tax preparers can be costly. I was able to get help from the IRS through their website www.irs.gov, and over the phone (see website for phone numbers). It takes some patience to get through to them because sometimes the hold time is lengthy, but when you do get through the help is outstanding! That first year I did my taxes the old fashioned way…on paper! I completed them on paper for a couple of years actually. A few years into my daycare business I chose to have a professional complete my taxes, mostly because of some items to be addressed in our personal taxes that we weren’t sure how to handle. I was relieved to find out that I had been doing a pretty good job with my business taxes! The accountant was able to find a few more deductions that I hadn’t been claiming that proved to be very helpful. After that year, I chose to go back to doing my own taxes, but I decided to use one of the tax software programs. They turned out to be easier than I thought they would be and the online question center was very helpful. I loved that I was able to file my taxes electronically, which significantly reduced my wait time to receive my refund. I continued to complete my taxes using computer software for the duration of my child care business years. Personally, I think that you can successfully complete your business taxes yourself, especially using tax software, and save yourself significant money. It might be beneficial to have a professional do it the first year so you are certain that you are taking all of the deductions you should take. After that, you can look back on the first year taxes as you complete them yourself to ensure that you are completing them correctly.
What sort of deductions should you be claiming? One of the biggest deductions you should be logging is your mileage. This is actually one of the deductions that I wasn’t claiming until I had a professional complete my taxes. I found out that I had been missing out on a huge tax savings by not keeping track of my mileage. I didn’t fully understand what mileage I could claim for my child care business. I thought I could only claim mileage for field trips or training classes. How very wrong I was! A home daycare provider can claim mileage for ANY trip in which child care business is conducted. This means that every trip to the grocery store to buy food for daycare, every trip to buy art supplies or toys, every trip to the bank to deposit child care income, is a business trip and you should be keeping track of your mileage! Mileage is deductible from your home to the location and back again. That being said, you need to be honest with your mileage calculations. If in one day you first travel to the bank to deposit checks and then you head to the grocery store to buy food before heading home, you can’t count mileage from home to the bank and from home to the grocery store. You need to calculate mileage from home to the bank, from the bank to the grocery store, and from the grocery store to your home to be fair. Just to give you an example of how large a deduction mileage can be…I live in a rural area, so a trip to the grocery store and back for me is about 30 miles. The bank is even further. In an average year, I was able to claim approximately 10,000 miles for a deduction for my child care business! This comes out to be a $3000-$4000 deduction! I know you are wondering what to do if you make a trip to the grocery store to buy both food for your business and food for your family. Can you claim that mileage? Absolutely! You are still there conducting daycare business, so that mileage is deductible! I know your next question is, “I didn’t keep track of my mileage for 2007, so do I lose out on that deduction?” Not necessarily. One method I use to calculate mileage is the receipt method. I am sure that you have been saving your receipts from trips to the store. You need them for tax purposes anyway (see next paragraph). You need to go back through your receipts and create a mileage log based on them. Count up how many times you went to each store and write it up, including the name, address, and reason for going to each store. Then you will need to logon to a website such as www.mapquest.com and choose the option for finding directions. Put in your starting address (usually your home) and the address of the store you went to. Then click on find directions. When the program lists the driving directions, it will also list the mileage. You will need to double the mileage, since the program only gives you mileage for the trip to the location, not for the return trip. Once you have the roundtrip mileage for a certain store, multiply the mileage by the number of times you went to that store for daycare business in 2007. Voila…you have a mileage log! You will need to calculate the number of times you went to the bank for childcare also, and use the same method as above for calculating the mileage. If you don’t save all of your deposit receipts, go back through your checkbook registers to find all of your deposits. Remember to include things like field trip mileage, or trips back and forth from the school if you pick up child care children from preschool or kindergarten. Using this method will give you a fairly accurate calculation of your mileage and can provide you with a huge tax deduction!
Another deduction that you should be claiming is the cost of food and supplies for child care. This is another huge tax deduction! There are two ways to handle food for child care. You can either shop separately for your daycare food than for food for your family, or you can shop for both at the same time and separate items for daycare later on your receipt. Personally, I didn’t shop separately for two reasons. First, if you shop for food that is to be used for your home daycare business, then that food can ONLY be used for your home child care business! That means that if your son or daughter wants to take a granola bar to school for snack and you purchased those for daycare, you are going to have to say no. I know that sounds extreme, but if you are claiming those items as strictly child care items, you need to keep them separated from food for your family. Secondly, it is really a pain in the neck to do separate shopping for your family and your business! It means either separate trips to the store, or at least separate shopping carts in the store! The advantage to shopping separately is that you can claim every penny spent on food for child care on your taxes. I chose to shop for my family and my business together and not to keep the food separated. It made things a lot easier in my house. However, it did make my record keeping for my business a little trickier. Once a month I had to go through my grocery receipts and mark off items that I knew were not used for child care, such as coffee or soda pop. Once I had eliminated those items from my receipt total, I then had to calculate which items on the receipt were food items, which were consumable items (like toilet paper) and which were non-consumable (like toys). I then calculated a total amount for that receipt of each of these categories and wrote it at the top of the receipt. Come tax time, I calculated a total amount spent for the year for each of these categories. Then, in order to fairly calculate a deduction for each of these categories based on how much was used for child care and how much was used for my family, I had to apply the time-space formula to each category. The time-space formula is an invaluable equation that allows you to fairly claim child care expenses based on how many hours out of the year you spend being a daycare provider. The equation is fairly simple. First, you need to calculate the approximate amount of space in your home that you use for your child care business. You need to include every space that is ever used for daycare. You need to include your primary child care room of course and your kitchen. But you also need to include the bathrooms that the kids use, the dining area if they eat or do crafts there, the laundry room since you will invariably be washing blankets, sheets, towels, etc. that were used for daycare, any rooms in which children nap, your home office if you use it to create forms and file business paperwork, and any other place the kids use. You need to exclude any rooms that the children in your care never use. Be fair in calculating the approximate percentage of your home that is used in your business. Once you have this percentage, you need to figure out the approximate number of hours you spent in 2007 performing duties related to your business. You, of course, need to figure out the number of hours per day that you actually care for children. You also need to take into consideration the approximate amount of time per day that you spend cleaning up from child care or getting ready for child care. Then you need to figure out exactly how many days you provided these services in 2007. You then multiply the number of hours per day by the number of days you provided care. That gives you the number of hours you spent in your business in 2007. Now you need to figure out the percentage of hours you spent in your business compared to the number of hours in a year. There are 8760 hours in a year. So, take the number of hours you spent doing daycare and divide it by 8760 and this will give you the percentage of time you spent doing child care in 2007. Finally, you need to multiply the percentage of time you spent doing daycare by the percentage of your home used for business to find a final percentage that you can claim for costs shared by your business and your family. This gives you your time-space percentage. Here is an example: Let’s say you decide that you use 80% of your home for your business. Now, you spend on average 10 hours per day on your business and you calculate that you spent 200 days being a child care provider in 2007. Multiply the 10 hours per day by the 200 days (10 X 200), to find that you spent 2000 hours providing child care services in 2007. Since there were a total of 8760 hours available in 2007, you will now divide your 2000 hours by 8760 hours (2000 divided by 8760) to find that you spent about 22.8% of your time being a daycare provider in 2007. You can round that up to 23%. For your final calculation, you need to multiply the amount of space used in your home by the amount of time spent doing daycare to find a final percentage that you can claim. In this case, you would multiply the percent usage of your home (80%) by the percent of time spent (23%) (80% X 23%) to get a final percentage of 18.4% or 18% since we would round down. This is the percentage of food, consumable items, utilities, and mortgage interest you will be able to claim for your child care business. The calculation takes a few minutes, but it saves a lot of headache in the end. Non-consumable items like toys or cookware are 100% deductible for your business.
If you have a professional complete your taxes, you will want to make sure to have all of your information with you at the initial meeting. This will save you from having to get information to him/her later and can actually save you money in tax preparation fees. My accountant charged me less because she had less work to do since I had done most of the information preparation done before I met with her. You will want to bring a sheet that shows the total amount of income for your business for 2007, a calculation of your time-space formula, a list of expenses (include a note about which ones should be multiplied by the time-space formula), a mileage log, and any other information relevant to the business (such as a tax id if you have one). Be prepared to back up all of this information with receipts if your accountant wants to see them. Don’t stress if you don’t have everything the accountant wants. You can get it to them later if necessary. If you don’t have everything in order the accountant will let you know, but it will cost you more since the accountant will have to spend more time in preparing your taxes. Be as prepared as you can and you will have much better, and cheaper, results!
This is just the tip of the iceberg when it comes to tax preparation for home child care businesses. This seems like an overwhelming amount of information, but there is actually a lot more. Don’t give up yet. There are a lot of resources for you to get more information, such as the IRS, an accountant, or a local organization. The best advice I can give a home daycare provider is to be incredibly organized. Keep all of your receipts, keep an accurate mileage log, keep an accurate receipt book recording income, and keep all of it readily available. If you follow this advice filing your taxes will be much easier!
To help you keep track of all of these records, check out this great daycare software! Click Here! Remember to check back here weekly for more tax tips for daycare providers!
It’s tax time – are you ready? Chances are, if you started a home based child care business in 2007 you are feeling very overwhelmed about your taxes. I know that feeling! I ran a home daycare for nine years and tax season can be intimidating! Whether you are having a professional complete your taxes or you are doing them yourself, there are several things you need to know to help the process go more smoothly.
First let’s talk about the issue of professional tax preparers versus doing it yourself. Which method is better? I personally have used both methods. The first year I needed to file taxes for my home child care business, I attended a workshop put on by a local community college that dealt specifically with taxes for child care businesses. It was extremely helpful. I would suggest asking around to find out if there is something like that available in your area. You can check with other daycare providers, local community colleges, or child care organizations to see if someone can point you in the right direction. After attending the seminar, I decided to do the taxes myself that first year. I felt like I had a pretty good handle on the situation and professional tax preparers can be costly. I was able to get help from the IRS through their website www.irs.gov, and over the phone (see website for phone numbers). It takes some patience to get through to them because sometimes the hold time is lengthy, but when you do get through the help is outstanding! That first year I did my taxes the old fashioned way…on paper! I completed them on paper for a couple of years actually. A few years into my daycare business I chose to have a professional complete my taxes, mostly because of some items to be addressed in our personal taxes that we weren’t sure how to handle. I was relieved to find out that I had been doing a pretty good job with my business taxes! The accountant was able to find a few more deductions that I hadn’t been claiming that proved to be very helpful. After that year, I chose to go back to doing my own taxes, but I decided to use one of the tax software programs. They turned out to be easier than I thought they would be and the online question center was very helpful. I loved that I was able to file my taxes electronically, which significantly reduced my wait time to receive my refund. I continued to complete my taxes using computer software for the duration of my child care business years. Personally, I think that you can successfully complete your business taxes yourself, especially using tax software, and save yourself significant money. It might be beneficial to have a professional do it the first year so you are certain that you are taking all of the deductions you should take. After that, you can look back on the first year taxes as you complete them yourself to ensure that you are completing them correctly.
What sort of deductions should you be claiming? One of the biggest deductions you should be logging is your mileage. This is actually one of the deductions that I wasn’t claiming until I had a professional complete my taxes. I found out that I had been missing out on a huge tax savings by not keeping track of my mileage. I didn’t fully understand what mileage I could claim for my child care business. I thought I could only claim mileage for field trips or training classes. How very wrong I was! A home daycare provider can claim mileage for ANY trip in which child care business is conducted. This means that every trip to the grocery store to buy food for daycare, every trip to buy art supplies or toys, every trip to the bank to deposit child care income, is a business trip and you should be keeping track of your mileage! Mileage is deductible from your home to the location and back again. That being said, you need to be honest with your mileage calculations. If in one day you first travel to the bank to deposit checks and then you head to the grocery store to buy food before heading home, you can’t count mileage from home to the bank and from home to the grocery store. You need to calculate mileage from home to the bank, from the bank to the grocery store, and from the grocery store to your home to be fair. Just to give you an example of how large a deduction mileage can be…I live in a rural area, so a trip to the grocery store and back for me is about 30 miles. The bank is even further. In an average year, I was able to claim approximately 10,000 miles for a deduction for my child care business! This comes out to be a $3000-$4000 deduction! I know you are wondering what to do if you make a trip to the grocery store to buy both food for your business and food for your family. Can you claim that mileage? Absolutely! You are still there conducting daycare business, so that mileage is deductible! I know your next question is, “I didn’t keep track of my mileage for 2007, so do I lose out on that deduction?” Not necessarily. One method I use to calculate mileage is the receipt method. I am sure that you have been saving your receipts from trips to the store. You need them for tax purposes anyway (see next paragraph). You need to go back through your receipts and create a mileage log based on them. Count up how many times you went to each store and write it up, including the name, address, and reason for going to each store. Then you will need to logon to a website such as www.mapquest.com and choose the option for finding directions. Put in your starting address (usually your home) and the address of the store you went to. Then click on find directions. When the program lists the driving directions, it will also list the mileage. You will need to double the mileage, since the program only gives you mileage for the trip to the location, not for the return trip. Once you have the roundtrip mileage for a certain store, multiply the mileage by the number of times you went to that store for daycare business in 2007. Voila…you have a mileage log! You will need to calculate the number of times you went to the bank for childcare also, and use the same method as above for calculating the mileage. If you don’t save all of your deposit receipts, go back through your checkbook registers to find all of your deposits. Remember to include things like field trip mileage, or trips back and forth from the school if you pick up child care children from preschool or kindergarten. Using this method will give you a fairly accurate calculation of your mileage and can provide you with a huge tax deduction!
Another deduction that you should be claiming is the cost of food and supplies for child care. This is another huge tax deduction! There are two ways to handle food for child care. You can either shop separately for your daycare food than for food for your family, or you can shop for both at the same time and separate items for daycare later on your receipt. Personally, I didn’t shop separately for two reasons. First, if you shop for food that is to be used for your home daycare business, then that food can ONLY be used for your home child care business! That means that if your son or daughter wants to take a granola bar to school for snack and you purchased those for daycare, you are going to have to say no. I know that sounds extreme, but if you are claiming those items as strictly child care items, you need to keep them separated from food for your family. Secondly, it is really a pain in the neck to do separate shopping for your family and your business! It means either separate trips to the store, or at least separate shopping carts in the store! The advantage to shopping separately is that you can claim every penny spent on food for child care on your taxes. I chose to shop for my family and my business together and not to keep the food separated. It made things a lot easier in my house. However, it did make my record keeping for my business a little trickier. Once a month I had to go through my grocery receipts and mark off items that I knew were not used for child care, such as coffee or soda pop. Once I had eliminated those items from my receipt total, I then had to calculate which items on the receipt were food items, which were consumable items (like toilet paper) and which were non-consumable (like toys). I then calculated a total amount for that receipt of each of these categories and wrote it at the top of the receipt. Come tax time, I calculated a total amount spent for the year for each of these categories. Then, in order to fairly calculate a deduction for each of these categories based on how much was used for child care and how much was used for my family, I had to apply the time-space formula to each category. The time-space formula is an invaluable equation that allows you to fairly claim child care expenses based on how many hours out of the year you spend being a daycare provider. The equation is fairly simple. First, you need to calculate the approximate amount of space in your home that you use for your child care business. You need to include every space that is ever used for daycare. You need to include your primary child care room of course and your kitchen. But you also need to include the bathrooms that the kids use, the dining area if they eat or do crafts there, the laundry room since you will invariably be washing blankets, sheets, towels, etc. that were used for daycare, any rooms in which children nap, your home office if you use it to create forms and file business paperwork, and any other place the kids use. You need to exclude any rooms that the children in your care never use. Be fair in calculating the approximate percentage of your home that is used in your business. Once you have this percentage, you need to figure out the approximate number of hours you spent in 2007 performing duties related to your business. You, of course, need to figure out the number of hours per day that you actually care for children. You also need to take into consideration the approximate amount of time per day that you spend cleaning up from child care or getting ready for child care. Then you need to figure out exactly how many days you provided these services in 2007. You then multiply the number of hours per day by the number of days you provided care. That gives you the number of hours you spent in your business in 2007. Now you need to figure out the percentage of hours you spent in your business compared to the number of hours in a year. There are 8760 hours in a year. So, take the number of hours you spent doing daycare and divide it by 8760 and this will give you the percentage of time you spent doing child care in 2007. Finally, you need to multiply the percentage of time you spent doing daycare by the percentage of your home used for business to find a final percentage that you can claim for costs shared by your business and your family. This gives you your time-space percentage. Here is an example: Let’s say you decide that you use 80% of your home for your business. Now, you spend on average 10 hours per day on your business and you calculate that you spent 200 days being a child care provider in 2007. Multiply the 10 hours per day by the 200 days (10 X 200), to find that you spent 2000 hours providing child care services in 2007. Since there were a total of 8760 hours available in 2007, you will now divide your 2000 hours by 8760 hours (2000 divided by 8760) to find that you spent about 22.8% of your time being a daycare provider in 2007. You can round that up to 23%. For your final calculation, you need to multiply the amount of space used in your home by the amount of time spent doing daycare to find a final percentage that you can claim. In this case, you would multiply the percent usage of your home (80%) by the percent of time spent (23%) (80% X 23%) to get a final percentage of 18.4% or 18% since we would round down. This is the percentage of food, consumable items, utilities, and mortgage interest you will be able to claim for your child care business. The calculation takes a few minutes, but it saves a lot of headache in the end. Non-consumable items like toys or cookware are 100% deductible for your business.
If you have a professional complete your taxes, you will want to make sure to have all of your information with you at the initial meeting. This will save you from having to get information to him/her later and can actually save you money in tax preparation fees. My accountant charged me less because she had less work to do since I had done most of the information preparation done before I met with her. You will want to bring a sheet that shows the total amount of income for your business for 2007, a calculation of your time-space formula, a list of expenses (include a note about which ones should be multiplied by the time-space formula), a mileage log, and any other information relevant to the business (such as a tax id if you have one). Be prepared to back up all of this information with receipts if your accountant wants to see them. Don’t stress if you don’t have everything the accountant wants. You can get it to them later if necessary. If you don’t have everything in order the accountant will let you know, but it will cost you more since the accountant will have to spend more time in preparing your taxes. Be as prepared as you can and you will have much better, and cheaper, results!
This is just the tip of the iceberg when it comes to tax preparation for home child care businesses. This seems like an overwhelming amount of information, but there is actually a lot more. Don’t give up yet. There are a lot of resources for you to get more information, such as the IRS, an accountant, or a local organization. The best advice I can give a home daycare provider is to be incredibly organized. Keep all of your receipts, keep an accurate mileage log, keep an accurate receipt book recording income, and keep all of it readily available. If you follow this advice filing your taxes will be much easier!
To help you keep track of all of these records, check out this great daycare software! Click Here! Remember to check back here weekly for more tax tips for daycare providers!
Tax Tip Number Two
It is time for tax tip number two! My tax tip for this week is about how to report daycare totals to parents. You are required by law to furnish each family with a report that shows how much they paid you in child care expenses for a year. You also need to supply each family with your legal name, your business name if you have one, your address, your phone number, and your tax ID number or social security number, whichever you are using. The easiest way I have found to do this is to provide each family with a W-10. This is an IRS form that you can download from the website www.irs.gov. Once you get onto the website, use the search function and type in w-10. It will only pull up one option. Click on the W-10 and download it. Then you can print it out. This form is used to supply your information to your families. However, it does not include a place to put the amount paid to you. What I did was to modify the form. This form does not have to be filed with a family's taxes, so it is ok if it is not an original form and it is ok to change the format. I looked at the form W-10 and made my own version using my word processing program. I made sure my version contained all of the information required on the original form. Then, instead of including the lengthy directions included at the bottom of the original form, I created a section that listed the name of the family I was supplying the form to, the children's names, the family's address and phone number, the amount charged to them for daycare that year, and the amount they paid for daycare that year. Then I printed out multiple copies of my new form and filled one out for each family. Don't forget to provide these forms to the families of ALL of the children you cared for in that year, including families that may have left you earlier in the year. Refer to your receipt book to make sure you include all families and to calculate totals. I always included a short letter with each form letting the parents know what the form was and that they did not need to file the actual form with their taxes. Rather they should keep it with a copy of their taxes to reference in the future if needed. My parents loved receiving an official form that contained all of the information they needed for their taxes!
Wednesday, February 20, 2008
Tax Tip for Home Child Care Providers
Tax time can be stressful for home daycare providers, because there is so much information to gather. I will be publishing one tax tip each week through April 15, to try to make this process as painless as possible. Also, look for my new article, "Important Tax Deductions for Home Daycare and Child Care Providers" to be published in the next couple of days on EZineArticles.com. It contains a detailed look at two important tax deductions that you definitely need to claim as a child care provider.
My tax tip for this week is to organize your receipts by month. Before I became a child care provider I didn't save my receipts unless I had paid by credit card or there was a possibility that I might need to return something. I certainly never saved my grocery receipts. But I received good advice from another provider when I got started - NEVER throw away a store receipt! I began by just stuffing all of my receipts into a large envelope and never looked at them again until tax time. While this works, it makes tax time very time consuming! I recommend creating an envelope for each month. As you get receipts just put them in the correct envelope. Then, at the end of each month, take 30 minutes and tally the receipts for that month.
Write the totals on the front of each envelope. (For category suggestions and how to tally receipts, see the above mentioned article.) If you keep up with this process tax time will be a breeze! If you want to be even more organized with your receipts, check out this cool daycare management software! Click Here! Remember to check back here weekly for more tax tips for daycare providers!
My tax tip for this week is to organize your receipts by month. Before I became a child care provider I didn't save my receipts unless I had paid by credit card or there was a possibility that I might need to return something. I certainly never saved my grocery receipts. But I received good advice from another provider when I got started - NEVER throw away a store receipt! I began by just stuffing all of my receipts into a large envelope and never looked at them again until tax time. While this works, it makes tax time very time consuming! I recommend creating an envelope for each month. As you get receipts just put them in the correct envelope. Then, at the end of each month, take 30 minutes and tally the receipts for that month.
Write the totals on the front of each envelope. (For category suggestions and how to tally receipts, see the above mentioned article.) If you keep up with this process tax time will be a breeze! If you want to be even more organized with your receipts, check out this cool daycare management software! Click Here! Remember to check back here weekly for more tax tips for daycare providers!
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