Family Child Care Providers
by Tom Copeland
Must a family child care provider claim all her allowable deductions on her tax return?
According to two IRS authorities, the answer is "yes."
IRS Tax Code TITLE 26, Subtitle A, CHAPTER 2, Sec. 1402 (a) says, "Net earnings from self-employment — The term 'net earnings from self-employment' means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business..."
IRS Publication 596 (2004) Earned Income Credit says, "When figuring your net earnings from self-employment, you must claim all your allowable business deductions."
The issue of whether or not to claim all allowable deductions usually comes up when determining the earned income credit. Because of the way the earned income credit works, there are circumstances where lower business deductions will increase the credit. As a result, some providers and tax preparers try to increase a tax refund by arbitrarily reducing some business expenses to obtain a higher earned income credit. This is clearly not allowed.
The situation where this issue is more difficult to address is where claiming all allowable deductions creates, or increases, a business loss on your tax return. An IRS agent told me recently that providers should always claim all allowable deductions even if doing created a loss or increased a loss. The problem is that doing so can trigger an audit. The IRS is more likely to audit providers who show business losses, particularly if such losses appear several years in a row. In such audits, it is common for the auditors to disallow deductions.
Therefore, what should you do when confronted with this situation? My advice would be that you should not reduce deductions if doing so will increase the earned income credit. But other than this situation, you should carefully assess whether or not to claim deductions that create or increase a loss. Some providers work 24 hours a day and have a very high Time-Space percentage. It is prudent not to claim some of these hours if doing so can prevent a loss. Other situations where you may not want to claim deductions is where you have an expensive home and thus high house expenses. Between now and the end of the year, the best advice is to keep track of all business expenses by saving receipts and other documents. You can determine at tax time how to handle these records.
As a general rule, I strongly advise providers to claim all allowable business deductions. When you have a business loss, I suggest using some caution.
This handout was produced by Think Small (www.thinksmall.org)
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Facebook - http://www.facebook.com/tomcopelandblog
"Become a member of the National Association for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."