The short answer: probably not!
This is a sentence I hear at my tax desk every year, “I bought this for my business or I did that for my business but I’m not going to claim it because I have too many deductions!” Seriously? No you don’t.
I guess I should back track a little on this—if you’re claiming stuff you shouldn’t be claiming—that’s another story. But if you own a business and you have a legitimate business expense—then claim it.
Often times, small businesses, especially in the beginning, have losses. On your tax return it’s called a net operating loss or NOL. If you have an NOL, you carry that back two years and use it to offset income that you had two years ago. If you still have a loss, you can carry it forward for another 20 years!
Now sometimes you have an expense that gets limited if your business doesn’t have enough income—like a section 179 deduction or a home office expense. That doesn’t mean that you can’t claim these things, they just get carried forward to be used to offset your future income.
Don’t skip your deductions! I can’t stress this enough. Often, at the “big box” stores, they’ll skip your home office deduction because they’re “saving you money by not claiming it” since they charge you for each form. But it’s like that old expression, “pennywise and pound foolish.” Sure, you save a few bucks by not filing the 8829 form, but you just lost the carry-forward of a few hundred dollar deduction. This is especially important this year with taxes most likely going up next year. Even if your deductions won’t help your tax return right now—do not just leave them off. Otherwise, you would have to amend your prior returns to carryforward the deductions which will cost even more money in the end!
It’s still November, you have plenty of time to round up your receipts, review your mileage log, and make sure that you’re doing everything you need to be doing to maximize all of your deductions. Obviously you can’t claim stuff that’s not a real business expense. But you can claim everything that is a legitimate expense for your business. Not only can you claim it—it’s the right thing to do.
For those of you who do not have a home office, these posts will help get you started:
Right now, I’m sitting in my comfy chair in the corner by the window of my home office and drinking a freshly brewed cup of coffee from my favorite mug. The dog has done her security patrol of the perimeter, deemed me to be safe from the local deer and bunny rabbits, and has settled in for her morning nap. I’m having one of those, “This is why I’m doing this,” kind of moments and it’s nice.
As a tax person who specializes in small businesses, I get asked a lot of questions about different business practices–Should I set up an LLC? I always answer, “That depends.” Should I lease a car or buy it? That depends. Should I set up as a sub-chapter S corporation? That depends. You get the picture. But when people ask me about a home office I always say, “Yes! Every small business owner who files a schedule C should have a home office.” My answer has nothing to do with the comfy chair and coffee either. As usual with me–it’s all about the money.
A home office is good for your tax return. First, you get to use a portion of your living expenses (that you would already be paying anyway) to offset your self employment income. Remember–your self employment income is taxed at 13.2% more than your regular income tax so even something like your mortgage interest-which is already deductible, is a better deduction when it goes against your self employment income. Kaching!
a home office is foThe other reason you want r your mileage. Yes, you read that right–you want the home office deduction to claim mileage. Here’s the deal–let’s say you’re a contractor, you drive to jobs all over town. You probably put close to 20,000 miles on your truck a year for business. You claim that on your tax return and get audited. (Side note: claiming exactly 20,000 business miles on your tax return will get you audited it’s a red flag.) Anyway, you go through the audit process and the IRS disallows all 20,000 miles because you’re commuting to those job sites from your home and commuting miles are not tax deductible. That’s over $3800 worth of tax money that you just lost right there. Add the fines and penalties and you’re well over 5 grand in tax debt.
But if you had a home office–all of that mileage becomes deductible because ou’re traveling from your office to a job site.
But what if I don’t really have a home office? Seriously, you need to set something up. It doesn’t have to be a whole room–it can be a corner of a room (like my comfy chair spot although most people have a desk or table.) You can’t just say you have a home office on your tax return and not really have one. (You’ve heard of fraud, right?) Be be realistic. If you have a small business–you’ve got something–files, or a computer, or make up, or something–and it needs to be put someplace. You need a spot to make phone calls from, pay the business bills, do your adminsitrative work–that’s your home office.
Aren’t I more likely to get audited if I claim a home office? To be honest, I keep hearing that, but my experience says no. The only time I’ve seen home office expenses audited was when they really were wrong and it was part of a broader audit. (Oh yeah, and when I redid those numbers correctly the taxpayer got a bigger home office deduction.) Be honest about it and you’ve got nothing to worry about.
But what if I have a real office in a business building that I go to every day? Can I still have a home office? Yes you can. You make your home office your administrative office. Like I said, pay bills, balance the business check book. I never meet clients in my home office, they always come to my “business office” location. My business office doesn’t prevent me from having an “administrative” office at home.
If you’d like more information about claiming a home office, try this link: http://robergtaxsolutions.com/2010/09/can-you-claim-a-home-office-deduction/ It has more information about the rules and what the IRS is looking for. But seriously, if you’re a sole proprietor, you need a home office.
First things first, let’s tackle the big “problem” many daycare providers have – licensing. The IRS demands that you report all of your daycare income, but if you’re not licensed, you don’t qualify to claim any of the deductions. Now the whole licensing thing varies by state. Here in Missouri, you do not have to have a daycare license if you care for four or fewer children who are not related to you. If you’re exempt from licensing requirements for your state, then you’re qualified to claim all of the federal tax deductions relating to your daycare business. Different states have different rules. Just across the river in Illinois, the licensing requirements are much stricter. Be sure to look up the rules for your state before you claim daycare deductions.
Your daycare income will go on a form called Schedule C which will be part of your regular 1040 tax return. You are required to pay self-employment tax on your daycare income; that will be 13.3% for 2011, generally it’s 15.3%. Self employment tax is in addition to your regular income tax, so you can see why claiming your expense deductions can come in kind of handy.
The first, and probably the biggest, daycare deduction is for the business use of your home. That’s going to go on a Form 8829 and it’s going to be linked to your Schedule C. You won’t be able to deduct all of your rent, utilities, and expenses, but you’ll be able to deduct a portion of them as a percentage of how much of the home the kids have access to and how long you’re open. Kids put a lot of wear and tear on your home so definitely take advantage of this deduction.
Another big expense for many daycares is food. You can deduct as a business expense 100% of the cost of the actual food the kids you care for eat. If you’re doing your taxes yourself when you’re looking at the actual Schedule C form, there’s a section for “meals and entertainment” –you don’t want to use that line. That only gets counted as a 50% expense – that’s for sales people taking clients out to lunch and stuff like that. You’re going to want to put the food for kids on a separate line in the “other” expenses category. Call it “food for kids”. (Okay, that seems pretty “duh” but I didn’t have a better way to say it.)
If you get reimbursements under the Child and Adult Food Care Program of the Department of Agriculture, that’s not taxable unless you get more money than you actually pay out for food for the kids. Usually, you’ll get a 1099 showing you received a payment. If that’s the case, you must report it as income on your Schedule C, but then you’ll deduct the cost of food in the expense category. (If you get a 1099 and don’t show it as income, you’ll get a nasty IRS letter—that’s why you want to show it on the Schedule C even though it’s not supposed to be taxable.)
If you’re deducting food, keep separate receipts for your daycare food from your family food. (Right, I know, that’s not easy.) But remember, you can’t take a deduction for the food you feed to your own family. Now let’s get real: you just shop and buy groceries for your daycare kids and your family in one fell swoop don’t you? (Okay, that’s what I’d do, and I’m one of those anal retentive accountant types!)
Here’s how you solve that problem. The IRS has official “snack and meal rates”. Granted, they haven’t been updated since June of 2010 but I’ll work with what the IRS gives me. The rates are as follows:
- Breakfast: $1.19
- Lunch: $2.21
- Dinner: $2.21
- Snack: $0.66
Alaska and Hawaii have different rates:
- Alaska: $1.89, $3.59, $3.59, $1.07
- Hawaii: $1.38, $2.59, $2.59, $0.77
So let’s say you take care of Oliver 5 days a week. His parents take care of breakfast and dinner, but you do provide lunch and a snack every day. Oliver stayed home two weeks over Christmas and one week over Easter, other than that you’ve had him all the other days. You take $2.21 for lunch and add $0.66 for lunch and that makes $2.87. That’s what you spend on Oliver’s food on a daily basis. You multiply that by 5 days a week and get $14.35. You multiply that by 49 weeks (there’s 52 weeks in a year and you didn’t have him for 3 weeks) and you get $703 spent on Oliver’s food that you can deduct from your income.
Granted, you probably spend more than that on your daycare kids, but at least this gives you something to work with, especially if you haven’t been keeping good records.
Don’t forget the other deductible things either: money you spend on toys and games, and extra costs of laundry and cleaning supplies. If you take the kids on field trips, be sure to keep track of your mileage and the cost of admission to events. And remember that if you’re reading magazines to help you with taking care of the kids, those can be a business expense too: things like Family Fun Magazine that give you tips on things to do with kids, that’s work reading.
Taking care of other people’s children is hard work. You deserve every penny you earn. My job is to help you keep it.
If you’ve claimed a home office deduction on your tax return, you’re familiar with the form—they ask you for the square footage of your home office and then they ask for the square footage of your home. Let’s say that your home is 2,000 square feet and your home office is 100 square feet, then your home office percentage is 5%. If your home operating expenses were $10,000 then you’d get to claim $500 for your home office deduction before claiming depreciation (because $500 is 5% of$10,000).
But did you know that if the rooms in your home are roughly the same size that you can figure the percentage based upon the number of rooms in your house? Say you had 8 rooms in your house, a kitchen, living room, dining room, family room, three bedrooms and your office. That would change your percentage to 12.5%, and now your deduction would be $1250—that’s more than double the difference.
Now if your home is like mine, your rooms aren’t all the same size and you can’t use the ‘number of rooms’ formula. But—the ‘number of rooms’ formula does help those of us who must use the regular square footage formula. You see, when you use the ‘number of rooms’ formula, you’re leaving out things like hallways, staircases, and bathrooms. When you’re determining the square footage for your whole home, you are allowed to deduct the following items from your total square footage:
o Space occupied by heating and air conditioning units, and water heaters
o Outside walls
By reducing your overall square footage, you increase the percentage that you can use for your home office expense. Using the office mentioned above, let’s say the taxpayer measures out his stairs, foyer, hallways, etc. and finds that it reduces his overall square footage by 500 feet. Now his percentage would be 6.67% raising his deduction to by $167 to $667.
This might not seem like a huge savings, and certainly it will vary depending upon the size of your home and your expenses. The important thing here is that its extra tax savings to you without spending any additional cash. You’ve done nothing extra except re-measure your house.
Let’s add depreciation into the mix. Let’s say, for this same house, the owner’s purchased it for $250,000. $50,000 of that was attributed to the cost of the land so we’re depreciating $200,000. If 5% of the home were depreciated, the deduction would be $256 (200,000 x 5% x 2.54% depreciation rate). By increasing the percentage used to 6.67%, then the depreciation would be $342, an increase of $86.
So now, by doing nothing more than re-measuring your house, you’ve increased your home office deduction by $253 and, if you’re self employed and in the 25% tax bracket, you’ve just saved yourself $101 in taxes.
This is one of those cases where everyone’s results will be different, but the example that I used was pretty conservative. It’s highly likely that you can save even more than this example does, especially if your expenses are higher or your home office is larger to begin with.
You always want to take advantage of any tax issue that puts money in your pocket without you putting money out. Re-measuring your home for the home office deduction is like a little gift from the IRS to help you save money on your taxes.