DAY CARE OWNER
TAX PREPARATION CHECKLIST
Filing your taxes can be challenging, but the right checklist can make the process easier. To prepare for your taxes, you’ll need to:
- Find out when your taxes are due.
- Gather the appropriate tax forms.
- Collect your business income records.
- Gather your receipts for business expenses.
- Request an extension if needed.
USE THE LIST BELOW TO COMPILE THE DOCUMENTS YOU’LL NEED TO FILE.
- Federal tax ID number
- Social security number
- Previous tax returns (up to three years)
- Income statement
- Balance sheet
- Bank and credit card statements
- Bank deposit slips
- Accounting documents
- Grouped receipts:
- Supplies
- Recurring operational costs:
- Rent
- Utilities
- Subscription-based services
- Transportation expenses
- Advertising and marketing
- Staff training costs
- Professional fees (e.g. accountants, attorneys, and consultants)
- Insurance policies (e.g. individual and group plan documents, company vehicle policies)
- Asset purchase details
- Depreciation schedules
- Payroll reports
- Form 1040: Annual income tax return for individuals
- Schedule C: Sole proprietorships and single-member LLCs
- Form 1065 Schedule K-1: Partnerships and multi-member LLCs
- 1099-MISC: Self-employed business owners
- Form 1120: Corporations and LLCs taxed as corporations
- Form 1120-S: S corporations
IMPORTANT LEGAL TAX OBLIGATIONS FOR CHILDCARE CENTERS
Childcare centers are subject to various federal and state tax requirements. At the federal level, childcare businesses are typically required to obtain an Employer Identification Number (EIN) from the IRS. This unique identifier is used for tax reporting purposes and is essential for opening bank accounts, hiring employees, and meeting other tax-related obligations.
In terms of federal taxes, childcare centers are generally subject to income tax and may need to file an annual income tax return. The nature of this tax liability depends on the legal structure of the childcare center, whether it operates as a sole proprietorship, partnership, corporation, or another form of business entity. Additionally, employment taxes, including Social Security and Medicare taxes, must be withheld and reported for employees.
At the state level, childcare centers are subject to state income tax regulations, which vary by jurisdiction. State requirements may include filing an annual income tax return and complying with specific tax obligations applicable to businesses. Additionally, depending on the state, sales tax may be applicable to certain services provided by childcare centers.
It is crucial for childcare center operators to stay informed about tax regulations at both the federal and state levels, ensuring proper documentation, reporting, and compliance with tax obligations. Seeking professional advice, such as consulting with a certified tax professional or accountant, can be instrumental in navigating the intricacies of federal and state tax requirements for childcare centers and maintaining financial integrity.
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Tax deductions and credits are available for childcare providers from the IRS based on eligibility. These can help reduce your taxable income or the amount of tax you owe. When operating a daycare or childcare center, certain business expenses are tax-deductible and can be claimed when filing your taxes.
SOME OF THE DEDUCTIBLE DAYCARE BUSINESS EXPENSES INCLUDE:
Necessary daycare supplies such as crayons, nap mats, and cleaning supplies are tax-deductible if used for business operations. These items should be claimed during the year of purchase with receipts.
Costs related to running a facility, including rent, utilities, and maintenance, are tax-deductible to ensure a safe environment for children.
Depending on the number of qualified business miles driven, vehicle expenses for transporting children on field trips, running business errands, and attending career-advancing classes may be deductible.
Items such as cribs, furniture, and playground equipment that last for more than one year have specific rules for claiming as capital purchases.
The cost of meals provided to children can be deducted based on standard meal rates for breakfast, lunch, dinner, and snacks. Documentation is required for all food purchases if opting to deduct the actual cost of food.
Wages, salaries, and employee benefits are tax-deductible as a business expense.
Costs for books, toys, and learning aids essential for creating a stimulating learning environment are deductible.
Childcare providers can deduct business-related fees such as childcare licensing fees, legal or accounting fees, and bank fees when filing taxes.
Gradual loss in the value of assets used in childcare, such as furniture and equipment, can be accounted for through depreciation deductions.
Other tax-deductible expenses for childcare providers may include advertising, daycare membership or subscription expenses, insurance, phone and internet service, and professional development expenses.
As a home-based daycare provider, you may be eligible for a tax deduction if you use your home space for business and meet certain state requirements. Deductible expenses may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, maintenance, and repairs.
HERE'S A SUMMARY OF TAX CREDITS TO CONSIDER FOR 2023 AND BEYOND FOR CHILDCARE PROVIDERS
Tax credits allow childcare providers to reduce their tax liability by deducting a specified amount from their total tax owed. Some tax credits to consider include:
This credit was designed to encourage business owners to retain their staff during the COVID-19 pandemic. While it cannot be claimed on 2023 tax returns, amendments to 2020 and 2021 returns can be filed to claim the credit if done before the IRS moratorium in September 2023.
From mid-2017 to the end of 2022, business owners purchasing expensive equipment could claim 100% of the asset’s bonus depreciation in the same year of purchase. Starting in 2023, this provision is being phased out, allowing business owners to claim only 80% of their assets’ bonus depreciation.
In 2023, businesses with up to 50 employees can claim a tax credit for 100% of the cost of starting a retirement plan (up to $5,000) and a credit for up to $1,000 in employer contributions to each employee’s plan. Note that this credit does not apply to businesses with 51 to 100 employees.
The Inflation Reduction Act of 2022 includes an update to the size of the Energy Efficient Commercial Buildings Deduction, allowing business owners to claim larger deductions for energy-efficient renovation projects. Additionally, businesses can receive a tax credit covering 30% of the cost of switching to low-cost solar power.
Small businesses using clean commercial vehicles, such as electric and fuel cell models, can benefit from tax credits covering up to 30% of purchase costs.
Employers with educational assistance programs can use them to help employees pay student loan obligations. This option is available for payments made after March 27, 2020, and will continue to be available until December 31, 2025. Employers may want to consider setting up educational assistance programs to attract and retain employees.
RECORD KEEPING AND DOCUMENTATION BEST PRACTICES FOR TAX PREPARATION
When it comes to taxes, having accurate records is crucial. It’s like having a solid foundation for your house, making everything easier. You want to be able to show exactly where your money came from and where it went. Clear records help you claim all the deductions you’re eligible for and ensure everything adds up correctly.
One of the most important records you’ll need to keep in order are your financial statements. These records show your income, expenses, and overall financial health, which is essentially everything the IRS needs to know about your business. Additionally, you’ll need to keep track of any receipts and invoices you’ve collected over the year. Think of them as proof of what you spent money on, whether it’s supplies, rent, or other business costs. Having these in order helps you claim all the deductions you can.
Don’t forget about your employee records. This includes details about how much you pay your staff, any taxes you take out, and benefits you provide. Keeping these records straight is essential for meeting your tax obligations. Maintaining accurate records and having the right paperwork ready sets you up for a smoother tax season, ensuring that you’re in compliance and are helping your childcare business stay financially sound.
DAYCARE RECEIPT AND TAX STATEMENTS
During tax season, not only will you have to provide your business income and expense information to the government, but you’ll also have families requesting daycare receipts. A childcare or daycare receipt is a document provided to families that totals their childcare payments from January 1 to December 31 of the previous year. Parents and guardians need this information to claim the expense on their taxes and receive a tax credit.
The Child and Dependent Care Tax Credit is a tax break specifically for working people to help offset the costs associated with caring for a child or dependent with disabilities. Rather than a deduction, which reduces the amount of taxable income, this is a tax credit that reduces taxes owed. Families can save hundreds or thousands of dollars by claiming their childcare expenses each year.