A Guide to Using TurboTax for a Family Child Care Business - Part I & 2

Tom Copeland for "Tom Copeland's Taking Care of Business" writes:  Do I recommend that family child care providers use tax preparation sofware?

Not unless you know exactly what you are entitled to deduct as a business expense, how much of these expenses you can deduct, and where they should appear on your tax forms.

The two major tax preparation software programs on the market are TurboTax and H&R Block Tax Software.

I've used TurboTax to do my own taxes for many years, so I want to point out a number of problems you can run into if you use it. (You will need to purchase the TurboTax Home & Businessversion for your business.)

Expenses

TurboTax will not tell you what you are entitled to deduct as a business expense, other than identifying the categories of expenses as they appear on the tax forms. In other words, the software will ask you to enter your expenses for Supplies, but won't tell you what you might include as supplies. Unless you know you can deduct flashlight batteries, laundry detergent, light bulbs, tinfoil, window cleaner, toilet paper, and so on, you will miss out on a lot of deductions.

Except for house expenses and items you are depreciating, the sofware will assume that any expense you enter is used 100% for your business. Since you will have many items that are used by your business and your family, you will need to multiply them by your Time-Space Percentage before entering them into the software.

This means you will have to know how to calculate your Time-Space Percentage on your own.

Food Expenses

TurboTax tells you to enter your food expenses under "Meals and Entertainment Expenses." You are given two choices: Meals and Entertainment: 50% Limit or 100% Limit.

Always choose 100% Limit for food served to daycare children.

Here's the explanation TurboTax gives about entering food expenses using the standard meal allowance rate, "If you are reimbursed for meals and snacks, you can deduct only the portion of the standard allowance that exceeds the reimbursement. Enter the total amount on the next screen."

This explanation is extremely misleading and confusing.

What this explanation is saying is if you received $4,000 from the Food Program and deduct $5,000 of food expenses using the standard meal allowance, you should report zero income and $1,000 as a food expense. This is called "netting" your food expenses. Then it says to put the "total amount" on the next screen. The total amount of what? The $5,000 or the $1,000?

If you received an IRS Form 1099 from your Food Program sponsor, TurboTax will tell you to put the entire amount down as income. If you then follow the above advice and only enter $1,000 as your food expense, you are cheating yourself out of $4,000 of business deductions.

Because TurboTax is not automatically "netting" your food expenses, report your total business food expenses ($5,000 in our example).

In an IRS audit, the auditor will always want to know how much you were reimbursed by the Food Program and your total food deduction. If you "net" this, you may not be keeping the proper records to explain yourself later.

Home Office Deductions

TurboTax has a series of screens to fill out to determine how much you can deduct of your house expenses. There are three screens that can cause confusion.

The screen "Enter the Square Footage of Your Home and Home Office" asks you to enter the "Total hours used for daycare during the year." But the explanatory box only talks about hours you are caring for children. It does not tell you to include all the hours you spend on business activities in your home when daycare children are not present (cleaning, activity preparation, meal preparation, record keeping, and so on).

This is a major ommission because most providers work hundreds of hours a year on such activities. Unless you know to add all of these additional hours on this screen, your Time-Space Percentage will be much smaller than it should be and you will pay more in taxes than you owe.

The screen "Business Conducted in Home Office" directs you to "Enter the percentage of time (your name) spends conducting business in the home office." You should enter 100% here. What they are asking is not how many hours you spend on business activities in your home (your Time Percent), but rather how much of your business is conducted in your home, versus somewhere else.

The screen "Does (your name) Have a Home Office?" asks if you use "part of this home exclusively for this business or does it meet one of these exceptions?" Answer "yes" to this question because child care is an exception to the general exclusive use rule for claiming house expenses.

Then the screen asks if you "use this home office on a regular basis for this business?" Answer "yes" to this question.

Health Insurance Premiums

TurboTax tells you "You can deduct up to 100% of health insurance premiums for you, your spouse and your dependents if you are self-employed and have a net profit from the business for which you created the plan."

This is misleading. It doesn't tell you that you are not entitled to claim this deduction unless you are not eligible to purchase health insurance through an employer. Therefore, if your husband's employer health insurance plan will cover you, you cannot use this deduction, even if you don't purchase the insurance through your husband's employer.

Tomorrow I will post Part II of "A Guide to Using TurboTax"  END of PART 1, BELOW is PART 2

My previous article discussed some problems that you will encounter if you use TurboTax softwareto prepare your tax return.

As I said before, I don't recommend using any tax software unless you know what you can deduct and know how to calculate the business portion of your deductions and where they go on the tax forms.

Here are some additional problem areas to be aware of when using TurboTax:

Safe Harbor/Simplified House Deduction Method

House expenses represent a significant business deduction for you. They include:

* Property tax

* Mortgage interest

* House insurance

* Utilities

* House repairs

* House depreciation

You are given three choices in how to claim your house expenses on a screen entitled "How do you want to enter your home office expenses?"

* "I'll enter my actual expenses with the Office Expense Expert"

* "I'll enter my actual expenses spreadsheet-style"

* "I'll take the simplified deduction"

As I've explained in an earlier article, almost every family child care provider should choose the first option. You can easily compare which option will give you the higher house deductions. Enter your expenses under the first option and see how this will impact your taxes. Then go back to this screen and choose the "simplified deduction" and you will immediately see that you will be entitled to claim fewer deductions.

The "simplified deduction" option allows all home-based businesses to multiply $5 by the number of square feet they use in their home for their business, up to a maximum of 300 square feet. This means the maximum house expenses you can claim under this option is $1,500 ($5 x 300 = $1,500). Because nearly every child care provider will have higher actual house expenses than this, it doesn't make sense to use this option.

But, more importantly, you don't want to choose the "simplified deduction" option because TurboTax has failed to include a special rule that applies only to family child care providers!

This rule says that providers must first multiply the $5 by their Time Percent. So, if your Time Percent was 40%, you maximum house deduction would be $600 (40% x $5 x 300 = $600). Clearly, $600 is not going to be more than your actual house expenses.

The fact that TurboTax has left out this limitation for family child care providers is a big problem. Because of this, I don't know how you could use this software if you wanted to use this rule.

Depreciation

Calculating your depreciation deductions is always a complicated task. Here are some tips to making this process easier if you use TurboTax:

As a general rule, items you purchased that cost more than $100 should be depreciated. This means you will be claiming the deduction over a number of years, not all in one year. When you start entering information about an item you will see this screen, "Describe This Asset."

Unfortunately, the screen will not tell you over how many years you can depreciate these items and you may be confused about which one to choose. I've listed the options below and added the number of years they are to be depreciated.

* "Computer, Video, Photo and Telephone Equipment" - These items will be depreciated over 5 years

* "Tools, Machinery, Equipment, Furniture" - These items will be depreciated over 7 years

* "Real Estate" - This is where you enter home improvements and your home. These items will be depreciated over 39 years.

* "Intangibles, Other Property" - This is where you put land improvements (fence, patio, driveway) that are depreciated over 15 years.

If you select the "Tools, Machinery, Equipment, Furniture" option, the next screen gives you the following options:

* "Office, furniture, fixtures and appliances"

* "General purpose tools, machinery and equipment"

* "Construction machinery and tolls"

* "Trailers and trailer-mounted containers"

Choose "Office furniture, fixtures and appliances." These items will be depreciated over 7 years.

When you select the "Real Estate" option, the next screen will give you the following options:

* "Nonresidential real estate"

* "Qualified retail improvements"

* "Qualified restaurant property"

* "Qualified leasehold improvements"

Choose "Nonresidential real estate" for both home improvements and your home.

When you get to the screen "Tell Us About this Asset/Large Purchase" it will give you the following three choices:

* "I traded in an old asset to acquire this one"

* "I purchased this asset new"

* "The item was sold, retired stolen, destroyed..."

What do you do if you purchased a used item? There is no place to choose this. Therefore, enter every item you purchased as "new."

But watch out for the next screen which is entitled "Special Depreciation Allowance." This screen will ask you if you want to take this special deduction (called the 50% bonus depreciation). You cannot use this special deduction if you purchased a used item. Therefore, answer "no" to this question.

For items you owned before you went into business and are now depreciating, enter the value of the items at the time you first started using them in your business, as if you purchased them new at that time. Again, do not use the special deduction (50% bonus rule) for such used items.

Depreciation from earlier years

If you have been depreciating items from earlier years, you will need to know the year you first started depreciating each item because this will affect your current year deduction.

(See my previous article "Get a Copy of Your Depreciation Schedule" to understand the importance of having your depreciation schedule from earlier tax years.)

Conclusion

If you don't understand what I've been describing in these two articles about TurboTax, don't use it! I've talked with providers who did use this software, got audited, and found out that they had incorrectly entered information into TurboTax. Even if TurboTax makes a mistake, you are still responsible for paying any taxes you owe.

I'm happy to try to answer your questions if you are using TurboTax. Contact me at tomcopeland@live.com; 651-280-5991.

Visit Tom Copeland @  www.tomcopelandblog.com & and learn of his book 2013 Family Child Care Tax Workbook and Organizer where he explains how to fill out all of your business tax forms.