| You are in the childcare business. Now what? You | | | | allowed to expense the first $5,000 of expenses |
| must decide a number of pressing questions. How | | | | in your first year of operation and any expenses |
| to organize my business? What forms do I need | | | | over that amount are capitalized and amortized |
| to keep track of? What logs of information do I | | | | (divided equally) over sixty months. Examples of |
| need to keep? Why does this all seem so | | | | startup costs are Legal and professional fees, |
| confusing? What planet do accountants and IRS | | | | supplies, toys, day care furniture, license fees, |
| agents come from anyways? | | | | education classes, etc. Capital costs might be |
| Take a deep breath and we will try to create | | | | room additions to bring the house in compliance, |
| some simple rules to add some sanity to the | | | | fence in the back play area and the like. |
| confusion. I'm going to start with a couple of | | | | Choice of Business Entity |
| advantages to running a child care center from | | | | The type of entity that you choose to operate |
| your personal home and will address some of the | | | | your business can have significant ramifications in |
| tricks to record keeping in its own special chapter. | | | | the future. Record keeping stays an important |
| Why is child care a business like no other? You | | | | component regardless of which entity you choose. |
| are allowed to follow your own special rules not | | | | We will address that in its own special chapter. A |
| allowed by any other business run out of your | | | | word about insurance would be appropriate at this |
| home. | | | | time. You should always maintain insurance on |
| See the IRS is not all bad. Oh my, I did just say | | | | your business no matter which entity you choose. |
| that? | | | | I will make the assumption that you are starting |
| You are allowed to count all the areas in your | | | | your business for the long term. With that |
| home used regularly for your business and not | | | | assumption your business will need to be |
| just those used exclusively for childcare when | | | | protected and as such will need liability insurance, |
| determining the space in the home that you can | | | | just like your home needs home owners |
| deduct. You are the only business that is allowed | | | | insurance. You are attempting to protect the |
| this treatment. | | | | source of your future income from loss. |
| Here comes the real meat and potatoes, the | | | | Now back to the subject at hand. |
| forms and code sections. (Ugh.) | | | | The moment you as an individual start to engage |
| The most important calculation that you need to | | | | in providing a service or providing a product to |
| understand is a formula called the Time-Space | | | | others you are engaging in a business. This |
| Calculation. This is the calculation that allows you | | | | business can be regulated or unregulated; the IRS |
| to make your personal expenses that no one else | | | | does not care for tax purposes. Your state |
| can deduct, as business expenses. In order to do | | | | licensing board obviously does care and you should |
| this the IRS demands that you report these | | | | follow all appropriate rules in your state. |
| expenses separately on form 8829. | | | | Sole Proprietor |
| First we need to determine the space component | | | | The default type of organization is the sole |
| of the calculation. Step one is to draw a floor plan | | | | proprietor. This is the easiest to form, (no cost) |
| of your home. Notice I said floor plan not blueprint. | | | | but could be the costliest in the long run. The sole |
| We are trying to determine the square-footage | | | | proprietor is fully liable for the debts and |
| of your rooms a percentage of your home and | | | | obligations of the business. The argument that I |
| are not trying to rebuild the home! Each room is | | | | hear from clients is I truly don't have own |
| labeled one of three titles: 100% Personal, 100% | | | | anything right now, why should I be concerned? If |
| business, shared. The IRS has ruled that for a | | | | you are taken to court and a judgment is |
| room to be counted as shared it must only be | | | | rendered against your business, it will be applied |
| used regularly for business, not exclusively. Each | | | | against all your current personal and business |
| year you will need to verify the space component | | | | assets now and in the future. |
| with a new floor plan of the home. | | | | Secondly, the net income of your business is |
| The second component of the calculation is the | | | | treated as a wage. You are both the employee |
| time component. This seems pretty straight | | | | and the employer. Most employees are unaware |
| forward. At first you may just count the hours | | | | that the employer matches an equal amount of |
| when children are present but you would be | | | | their social security tax. This amounts to 7.65% |
| missing out on all the other time spent in you | | | | from the employee and 7.65% from the |
| home working on your business. These hours | | | | employer totaling 15.3% on the first $90,000 of |
| include time spent preparing for the day, record | | | | wage (adjusted annually upwards). This tax is |
| keeping, and appointments with parents, and | | | | assessed over and above any federal and state |
| cleaning up from the day. Once you have | | | | taxes. |
| determined the space percentage and the time | | | | Single Member Limited Liability Company. |
| spent percentage you simply multiply the two | | | | As the name suggests, this is a form of an entity |
| percentages together and you are set to go. | | | | that will limit you from the full liability of the sole |
| Okay. Now what? | | | | proprietorship. The costs are nominal $130.00 in |
| Direct vs. Indirect Expenses | | | | the state of Wisconsin plus the attorney fees if |
| The easiest way to define direct business | | | | you require assistance. The taxes are exactly the |
| expenses is to call them expenses that you | | | | same as the sole proprietor, so the only |
| simply wouldn't have if you hadn't decided to start | | | | difference is the peace of mind of the limited |
| a daycare. Advertising, Liability Insurance, Toys, | | | | liability. |
| Art Supplies, etc. all fall into this category. | | | | Partnership |
| Indirect expenses are defined as those shared by | | | | Partnerships are two or more people organized to |
| you as an individual and your business. Rent, | | | | operate a business. There is no limited liability and |
| Mortgage Interest, Real Estate Taxes, Utilities, | | | | all partners are held responsible for the action of |
| Household supplies, Home Owners Insurance, | | | | each partner. If you do decide to organize a |
| Repairs and Maintenance, etc. fall into this | | | | partnership you can also use the multi member |
| category. The indirect expenses are put through | | | | limited liability company and your liability will limited |
| the time-space calculation and the direct expenses | | | | to the extent of business assets and your |
| are put directly to the business tax return. | | | | investment in the company. |
| The last wrinkle that you need to deal with is to | | | | Corporation |
| determine what a capital asset is verses an | | | | A corporation is considered an individual entity, and |
| expense. Assets are things that you own that will | | | | as such, needs to file its own income tax returns. |
| last longer than one year. For example, your | | | | You, as the owner, will receive a wage for |
| house, car, furniture, stove, refrigerator, | | | | working in the corporation and rent for the use of |
| microwave, are all assets. These items must be | | | | your property. Additionally, you will need to follow |
| depreciated, expensed over a period of time, not | | | | the rules of your state and should consult an |
| expensed in the current year. | | | | attorney. Make sure you are receiving the |
| You then need to determine if the item is shared | | | | benefits of liability protection and numerous other |
| or directly used by the business. Your house is | | | | tax strategies that are available. Consult your |
| used jointly. A daycare van used specifically for | | | | accountant or attorney to verify that you are |
| child transportation is a day care specific capital | | | | following rules and guidelines in your specific state. |
| expense. The jointly used assets must be | | | | Subchapter S Corporation |
| depreciated and applied to the time space | | | | The major difference between a regular |
| calculation. This manual does not allow enough | | | | corporation and an S-corporation is the way in |
| time for an in-depth discussion of depreciation | | | | which it is taxed. |
| rules. Hopefully, however, you have a general idea | | | | The S-corporation's profits are distributed to the |
| that there are different expenses and assets for | | | | owners, one or more, and are taxed to each |
| your business which need to be accounted for. | | | | shareholder as ordinary income. |
| Startup Costs | | | | As you can see, there are many choices when |
| Startup costs are the expenses associated with | | | | deciding to operate your business. Not every |
| starting a business, both direct and capital, made | | | | business is the same and therefore each business |
| prior to the actual start of operations. These | | | | must be examined to see which form of business |
| costs are treated differently than normal | | | | entity is right for you. If you are unsure, seek |
| expenses. The IRS does not want to see two | | | | professional guidance and explore which option is |
| years of startup expenses and no income on | | | | right for you. |
| your income tax return. Therefore you are | | | | |