Because of all of the special tax rules for Home Child Care operations, the Net Profit, Line 31, Schedule C, cannot be compared to the normal net profit for any other business. Nor does it reflect the business owner’s ability to repay a loan. Many tax deductible expenses are not directly incurred by the business but are allocated.
The following, by Schedule, Form and Line details the special circumstances for a Home Child Care operation.
Schedule C
Line 9, Car and Truck Expenses - This is an allocated, not direct, expense. A vehicle deduction is allowed when the trip is primarily daycare. This includes, but is not limited to, trips to the grocery store because the primary purpose is purchase of 100% deductible and shared Food and Consumables for the daycare clients. The trip would not be deductible by any other type of business and be routine for any person not in business at all.
Line 11, Contract Labor – This line should be examined in detail. A Provider is allowed to deduct $599 for each each of their own children that help in the daycare. No additional paperwork, like a 1099-MISC is required to be filed and the “payment” need not be in actual cash.
Unrelated helpers or substitutes are a direct expense, of course.
Line 13, Depreciation and Section 179 Expense Deduction - This is a normal allocated expense to be added back into Line 31.
Line 20(a), Rent or Lease: Vehicles - An allocated expense with the same explanation as Line 9, above.
Line 26, Wages – Because of the recent Tax Reconstruction Acts, parents can employ their own children to work for them in their business, to the extent of the Standard Deduction for a Single taxpayer each year, without the parent or child being required to remit federal payroll taxes. Again, the payment is not required to be in cash.
Line 27, Other Expenses (from Line 48) - This line can contain several categories that would not be deductible for any other business. The most common is Parties & Decorations. Decorating a private home for the holidays would not be deductible for any other type of business, nor would it be a factor on any personal loan application. It is deductible for a Home Child Care home, however, and should be considered a non-cash, allocated expense.
Line 30, Expenses for business use of your home - All expenses in this total, which flows from Form 8829, are allocated. None are direct expense of the business with two exceptions, 100% repairs and 100% maintenance which would be direct expenses.
So, to calculate the “Ability to Repay”, Schedule C, Line 31, Net Profit or (Loss), should be increased by Line 9, Line 11, Line 13, Line 20(a), parts of Line 27 and Line 30.
