"creative" suggestions for making child care a business expense


E

Elizabeth

I have a client who is a photographer (mainly weddings and
special events). She has a 2-yr old son who needs care both
while she is shooting and while she is editing. She
estimates that she needs 1200 to 1400 hours of child care
this year alone. Are there any legitimate ways she can make
this a business deduction? I'm thinking -- make the
babysitter an employee? The photographer has a studio
separate from her home, and in the studio she has one extra,
totally unused room that could be converted into a
child-care space. If she actually employed the babysitter,
and provided the major area of care within her studio (even
though the sitter could take the kids to activities and
maybe even to her own home on "outings"), would that qualify
for a legitimate business deduction?

If it could be structured as a legitmate business expense
with the baby-sitter as an employee, is there any way the
photographer could pay the babysitter as an independent
contracter instead of as an employee (much as she pays other
photographers who assist her on various shoots), issuing a
1099-MISC?

The photographer is currently a sole-prop.; would it make
any difference if the business was incorporated as an
S-corp? Would the value of the child care service be
imputed to the photographer on her w-2 anyway?

Currently, my thoughts are that babysitting is a personal
expense and only the first $3000 of it can qualify for
personal deduction on her 1040. But I told her I would ask
for opinions from you folks to see if anyone could suggest a
creative, yet legal and legitimate, way of making this a
business expense.

Thanks,
Elizabeth Brennan, EA
 
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P

Phil Marti

Elizabeth said:
Currently, my thoughts are that babysitting is a personal
expense
Here's a vote in support of your interpretation.
Babysitting is babysitting, no matter how you dress it up.
The only tax benefit available is the dependent care credit.
 
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H

Harlan Lunsford

Elizabeth said:
I have a client who is a photographer (mainly weddings and
special events). She has a 2-yr old son who needs care both
while she is shooting and while she is editing. She
estimates that she needs 1200 to 1400 hours of child care
this year alone. Are there any legitimate ways she can make
this a business deduction? I'm thinking -- make the
babysitter an employee? The photographer has a studio
separate from her home, and in the studio she has one extra,
totally unused room that could be converted into a
child-care space. If she actually employed the babysitter,
and provided the major area of care within her studio (even
though the sitter could take the kids to activities and
maybe even to her own home on "outings"), would that qualify
for a legitimate business deduction?

If it could be structured as a legitmate business expense
with the baby-sitter as an employee, is there any way the
photographer could pay the babysitter as an independent
contracter instead of as an employee (much as she pays other
photographers who assist her on various shoots), issuing a
1099-MISC?

The photographer is currently a sole-prop.; would it make
any difference if the business was incorporated as an
S-corp? Would the value of the child care service be
imputed to the photographer on her w-2 anyway?

Currently, my thoughts are that babysitting is a personal
expense and only the first $3000 of it can qualify for
personal deduction on her 1040. But I told her I would ask
for opinions from you folks to see if anyone could suggest a
creative, yet legal and legitimate, way of making this a
business expense.
What is it "they" say? something like... first impressions
are usually correct?

Even IF ok for a proprietor using business premises, said
provider would not qualify as independent contractor.

And any S corporation benefits would be taxable to a 2%
shareholder anyway.

Just hope the photographer has a profit, otherwise, no child
care credit even.

ChEAr$,
Harlan Lunsford, EA n LA
 
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L

L K Williams

Elizabeth said:
. . . on her w-2 anyway?

Currently, my thoughts are that babysitting is a personal
expense and only the first $3000 of it can qualify for
personal deduction on her 1040. But I told her I would ask
for opinions from you folks to see if anyone could suggest a
creative, yet legal and legitimate, way of making this a
business expense.
Creative, definitely! Deductible? I seriously doubt it!

The code requires business expenses to be "ordinary and
necessary." Babysitters would hardly qualify on either
count. Since she has a personal obligation of child care,
paying a babysitter, even if necessary to perform her
duties, is still a personal expense.

What other things could be called necessary and paid by the
business, so as to make them deductible? Maybe we should
start a poll?

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans
 
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S

Scott

Why not make the day care a business? Convert the room,
hire a person to take care of her children and take in other
children. One or two other children (depending on the ages)
could set up a nice little side business. Look for someone
who has a kid themselves who wants to work but stay close to
her child. Even if you break even, you can deduct a lot of
things that you couldn't do if you hired a babysitter.
Probably going to be a W2 employee doing it this way.

Just something to think about. Plus you could eventually
grow it into a full time side business that gives you more
contacts for your photo business.
 
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D

Dick Adams

Scott said:
Why not make the day care a business? Convert the room,
hire a person to take care of her children and take in other
children. One or two other children (depending on the ages)
could set up a nice little side business. Look for someone
who has a kid themselves who wants to work but stay close to
her child. Even if you break even, you can deduct a lot of
things that you couldn't do if you hired a babysitter.
Probably going to be a W2 employee doing it this way.

Just something to think about. Plus you could eventually
grow it into a full time side business that gives you more
contacts for your photo business.
That's thinking outside the box!

Unfortunately you need to go out of your way to make this an
arm's length transaction OR you will make an IRS auditor day.

Dick
 
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S

Stuart A. Bronstein

Here's a vote in support of your interpretation.
Babysitting is babysitting, no matter how you dress it up.
The only tax benefit available is the dependent care credit.
Under section 45F a credit is allowed to employers who
provide child care for their employees.

Stu
 
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E

Elizabeth

Harlan said:
Just hope the photographer has a profit, otherwise, no child
care credit even.
I have two clients who are wedding photographers in the
Pittsburgh PA area. They are both relatively new in the
business (one started in 2004, the other in 2005). I was
absolutely amazed at how very profitable the wedding
photography buisness is -- even from the first year! They
gross $2500 to $9000 per wedding, and book 20 to 40 weddings
per year.They have high equipment expenses, and significant
advertizing and marketing expenses (at least in the
beginning), but they are surprisingly profitable from
startup!
 
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E

Elizabeth

Scott said:
Why not make the day care a business? Convert the room,
hire a person to take care of her children and take in other
children. One or two other children (depending on the ages)
could set up a nice little side business. Look for someone
who has a kid themselves who wants to work but stay close to
her child. Even if you break even, you can deduct a lot of
things that you couldn't do if you hired a babysitter.
Probably going to be a W2 employee doing it this way.

Just something to think about. Plus you could eventually
grow it into a full time side business that gives you more
contacts for your photo business.
Hmm... thanks Scott! I really like this idea. I'll pass it
along to my client and we can both mull it over for a while.

I wonder -- does anyone see anything wrong with Scott's
approach?
 
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E

Elizabeth

L said:
What other things could be called necessary and paid by the
business, so as to make them deductible? Maybe we should
start a poll?
hmmm...

* business owner sets up secondary office in his home and
what used to be "communting miles" become "business miles"

* Sub-S Corp, owned by only one person, establishes
health-care insurance plan for families of employees, and
then employees only his own spouse, thus making his family
health care deductable for the business.

* Consultant deducts his lunches and dinners every day he
is servicing a client outside of his own office (i.e. "on
the road"), thus making many of his meals 50% business
deduction.

* office in home makes percentage of utilities, homeowners
insurance, repairs, rent (or depreciation) and maintenance
into business deductions (rather than non-deductible
personal expenses) + percentage of RE taxes and mortgage
insurance become business deductions which may or may not
have been deductible from personal return.

Isn't part of our job to help our clients structure their
businesses in such a way that they get the maximum legal
deductiblity of expenses?
 
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H

Harlan Lunsford

Scott said:
Why not make the day care a business? Convert the room,
hire a person to take care of her children and take in other
children. One or two other children (depending on the ages)
could set up a nice little side business. Look for someone
who has a kid themselves who wants to work but stay close to
her child. Even if you break even, you can deduct a lot of
things that you couldn't do if you hired a babysitter.
Probably going to be a W2 employee doing it this way.

Just something to think about. Plus you could eventually
grow it into a full time side business that gives you more
contacts for your photo business.
Hah; now THAT's creative.

Anyway, you would still have to segregate personal costs for
own kids and not deduct same.

ChEAr$,
Harlan Lunsford, EA n LA
 
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D

D.F. Manno

Dick Adams said:
Scott wrote:
That's thinking outside the box!

Unfortunately you need to go out of your way to make this an
arm's length transaction OR you will make an IRS auditor day.
Not to mention the regulations that day care centers must
meet in many jurisdictions.
 
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H

Harlan Lunsford

Elizabeth said:
L K Williams wrote:
hmmm...

* business owner sets up secondary office in his home and
what used to be "communting miles" become "business miles"
I wouldn't dare try this one. Any business expense must be
ordinary and necessary, and if my Sub S corporation has a
primary office in town where all my clients are, there is
absolutely no reason for me to have another office at home.
I THINK this was tried once upon a time.
* Sub-S Corp, owned by only one person, establishes
health-care insurance plan for families of employees, and
then employees only his own spouse, thus making his family
health care deductable for the business.
what about the related party rules which would attribute
spousal benefits to the 2% plus owner? In short, this
sounds like a section 105 plan which is not for corporate
personnel.
* Consultant deducts his lunches and dinners every day he
is servicing a client outside of his own office (i.e. "on
the road"), thus making many of his meals 50% business
deduction.
"On the road" means out of town overnight. Meals while in
town, at your tax home do not qualify.
* office in home makes percentage of utilities, homeowners
insurance, repairs, rent (or depreciation) and maintenance
into business deductions (rather than non-deductible
personal expenses) + percentage of RE taxes and mortgage
insurance become business deductions which may or may not
have been deductible from personal return.

Isn't part of our job to help our clients structure their
businesses in such a way that they get the maximum legal
deductiblity of expenses?
By all means that is our job, to use all legal means and tax
options for our clients.

ChEAr$,
Harlan Lunsford, EA n LA
 
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