| The key to record keeping is to simplify, simplify, | | | | Based on the above information you will be able |
| simplify. As with any other repetitive task you | | | | to create a depreciation schedule and claim the |
| want to make it as easy as possible so the main | | | | proper amount of expense. The depreciation |
| goal is achieved. At the end of the chapter I will | | | | schedule will either go directly to the business |
| reprint a copy of what the IRS is providing to its | | | | return or be further reduced by the time space |
| auditors when looking at child care centers. This | | | | percentage depending on whether it is a shared |
| information will give you some insight. | | | | asset or a total business asset. |
| The end result of keeping accurate records is | | | | Loan List |
| two-fold. Sometimes we get all caught up in | | | | You will need to keep track of the monies that |
| defending against problems with the IRS and tax | | | | are entering your business and from where. When |
| return preparation and that we forget the | | | | you make a loan to the business it needs to be |
| purpose of record keeping. We should be using | | | | tracked. The bank wants to get their money |
| the information from the records to advance our | | | | back when they loan you money and you should |
| business and allow us to make decisions on how | | | | want the business to return that money back to |
| to run the business more effectively. | | | | you as well. The money you loan to the company |
| Good record keeping will allow you to keep track | | | | should be deposited into your business bank |
| of the health of your business. Again, seek | | | | account, and the expenses that the loan was |
| professional help or read as many books as | | | | needed for will be recorded in the business |
| possible to aid you growing your business | | | | checking account. |
| effectively and keeping it on track. Don become | | | | Many times I will have a provider complain that |
| overwhelmed with everything in your business | | | | they are not being treated as a business person |
| and allow this area to be the one that always falls | | | | and instead are being treated as a baby sitter. |
| short. Remember the rule simplify! Get the | | | | Keeping accurate records and acting like a |
| information you need to make a proper decision | | | | business requires you to have good records. Be |
| and give the government the information they | | | | sure to keep strict separation between personal |
| need in the form of tax return or reports. | | | | expenses and business expenses. By doing this |
| Lets get started. | | | | you will be treated as the professional that you |
| There are a number of logs that are necessary in | | | | are, and will give you piece of mind when tax |
| the preparation of good records. They are: time, | | | | time or decision time arrives. |
| food, auto, and asset. In addition to these logs we | | | | Lastly, Direct Expenses |
| need to keep track of income sources: private | | | | All direct business expenses should be written |
| pay, government pay, grants, and food program. | | | | from your business checkbook. I have found that |
| The other sources of funding must also be | | | | using a credit card has been very helpful. If you |
| tracked: bank loans, vehicle loans, and loans from | | | | use a credit card use it for business purposes |
| others. The final things that need to be kept track | | | | only, and pay the balance monthly, you will be |
| of are the valid expenses of the business. | | | | able to track expenses easily. Debt is a burden |
| Lets break down each of the above in a little | | | | that will many times destroy a new business. |
| more detail. | | | | Good record keeping will allow you to better keep |
| Income sources | | | | track of the monies coming in and going out. You |
| 1. Private pay from parents by child | | | | should keep the receipts associated with the |
| 2. Food Program (USDA) | | | | expense and organize them by category, not the |
| 3. Grants | | | | month. The IRS wants to know the amount of |
| 4. Government Programs | | | | supplies, not January, February, etc. This will allow |
| I recommend that you keep track of each | | | | you to easily assemble the information for the |
| source of income separately and then report | | | | tax return or financial statement purposes. |
| them separately on your income tax return. Each | | | | Whether you decided to use a computer with the |
| source can be verified by the IRS so if you | | | | many programs that are available for record |
| report it this way there is no question to its | | | | keeping or not, the overall goal doesn't change. |
| accuracy. All money received should be deposited | | | | You need to systematically assemble the |
| into a business bank account. This allows you to | | | | information in a way that you can make decisions |
| easily verify the income to the deposits that | | | | from, and also comply with the laws of your |
| were made during the year. | | | | state and federal government. |
| Time, Food, and Auto | | | | I thought it would be helpful to take a look inside |
| Many states provide a calendar for the tracking | | | | what the IRS auditor would be looking for. In |
| of these figures. In the end we need to know | | | | 2004 the IRS published an audit guide for child |
| how many hours the day care was in operation | | | | care centers. This publication is used by auditors |
| to calculate the time space percentage (discussed | | | | to get up to speed on a certain industry segment. |
| previously.) Do this daily and weekly, (record on | | | | If you know what they are looking for you can |
| the calendar) to be able to answer all questions at | | | | better be prepared when the time comes. It is |
| the end of the year on your tax return. If you | | | | too late to prepare after you are selected for |
| are anything like me, you can't explain what you | | | | audit, because the audit will happen between two |
| did last week much less what you did eleven | | | | and three years after the year that they are |
| months ago. | | | | auditing. |
| In 2004 the IRS made a significant change in the | | | | The IRS has given its auditors specific guidance |
| calculation of food expense. Prior to 2004 the only | | | | that lets you know what issues the examiners |
| way to track food was to provide receipts of | | | | are looking for. This is not an absolute list because |
| food purchases. This method was always in | | | | the individual auditor can ask for anything they |
| question to providers on how to determine what | | | | want to look at but this is a great starting point. |
| was personally eaten food, (non-deductible) and | | | | From Child Care Providers Audit Techniques Guide |
| what was consumed by children, (deductible). We | | | | 1. Be prepared to discuss the business history |
| now have a new log to keep. You now need to | | | | including the starting date, a brief description of a |
| provide the number of breakfast, lunch, dinner, | | | | typical days activities, and internal controls for |
| A.M. snack and P.M snack. The IRS provides a | | | | income and expenses information |
| rate that is equal to the tier-one food rate for the | | | | 2. If you are taking a deduction for the use of |
| USDA food program. | | | | your home, provide a floor plan, blueprint or other |
| This new program eliminates the tracking of food | | | | significant documents to reflect the square |
| receipts. I still recommend keeping the food | | | | footage of the residence. Provide the escrow and |
| receipts to prove that you have spent at least | | | | or closing statement to verify the cost of the |
| what you are claiming. You are still allowed to | | | | property. Mortgage company statements showing |
| keep actual receipts and use those for expense. | | | | the paid property tax renting your home provide |
| Just realize that on audit the auditor will do a test | | | | substantiation of the expenses and a copy of the |
| of meals served and if your expense is higher | | | | rental agreement. |
| than the calculation of meals times rate they will | | | | 3. Provide copies of Federal Tax Returns for prior |
| argue to reduce the expense. | | | | and subsequent years, prior Federal and State |
| The auto log is simply the record of miles driven | | | | audit reports, any related returns: partnership, |
| on a personal vehicle for the pursuit of business. | | | | corporation, or employment tax returns and any |
| If the vehicle is used 100% for business you may | | | | Forms 1099 filed and/or received. |
| take the actual expenses for that vehicle. If you | | | | 4. Provide journals, ledgers, records, notebooks |
| share the vehicle for personal and business you | | | | used to keep a record of clients and the amount |
| need to determine the percentage of business | | | | they paid (weekly, monthly, etc) |
| that the vehicle was driven. The choice of using | | | | 5. Provide all bank statements, business and |
| actual or mileage method is made in the first year | | | | personal, for the period beginning _______ and |
| of service. In both methods you will need to keep | | | | ending _______. |
| an accurate mileage log. The total miles driven are | | | | 6. If you are participating in the food program, |
| also necessary. The other information needed is | | | | provide copies of the reimbursement statement, |
| date, miles driven, and what the business purpose | | | | name and address of the food sponsor, |
| was. This can be recorded on your calendar or a | | | | attendance and meal count record, and time |
| special book specifically for this purpose. Again, if | | | | record. |
| you do it daily, it becomes natural to you and the | | | | 7. Provide copy of any benefit or retirement plan. |
| information is readily accessible for tax time. | | | | 8. Provide substantiation in the form of canceled |
| Asset Log | | | | checks, receipts, statements, or invoices for |
| Asset Log is defined as: what is in your home | | | | expenses identified for examination. |
| that will last longer than one year. There are two | | | | 9. Provide all business licenses, approvals, |
| types of assets: those you owned before you | | | | registrations, and certifications. |
| started operation, and those you purchased after | | | | When facing an examination by the IRS, it is best |
| you started operations. These assets can be | | | | to provide the auditor with exactly what they ask |
| further broken down into those that are 100% | | | | for and nothing more. Answer only the questions |
| used for business and those that are shared by | | | | they specifically ask and avoid offering additional |
| you personally and the day care. No matter which | | | | information that they don't specifically ask for. |
| kind the assets are you need to record | | | | You don't want to expand the scope of the audit |
| information about them. | | | | by offering information that will lead to additional |
| Owned before operations started | | | | areas of inquiry. Do not go to the inquiry alone |
| 1. Asset Name (ie refrigerator) | | | | and preferable bring your tax advisor to assist |
| 2. Location (room from floor Plan) | | | | you. If the tax advisor has complete knowledge |
| 3. Fair Market Value at date of start of operation | | | | of your return he/she may prefer to complete |
| 4. How you determined value | | | | the audit without you present. This normally |
| 5. Asset type | | | | avoids the expansion of the audit and allows it to |
| Purchased after operation started | | | | proceed to a conclusion as quickly as possible. |
| 1. Asset Name (ie refrigerator) | | | | If you take the process of record keeping one |
| 2. Location (room from floor plan) | | | | step at a time and do one thing every day you |
| 3. Date Purchased | | | | will stay on top of the work and benefit from the |
| 4. Where purchased | | | | wealth of knowledge that can be derived from |
| 5. Asset Type | | | | that information. |