Daycare Tax Tips

Provider's income seems too low

What's wrong with this picture?

A child care provider writes:

> I'm looking at my Form 1040, federal income tax return. Why is my adjusted gross income (line 37) only $16,273 when the gross income on my business Schedule C line 7 is $52,826? Shouldn't the adjusted gross income be almost same amount? Why is it so low? I make more than $16k.

The adjusted gross income on the front of your Form 1040 is only about $16,000 because you are taxed on "net" business income, not gross income.

Look again at your Schedule C. Part I shows gross income of $52,826. Part II shows Schedule C business expenses of $15,059 (line 28) and also business use of home expenses (from Form 8829) of $31,017 (line 30). After subtracting these expenses, your net business income (or profit) is only $6,750. This amount is shown on line 12 of your Form 1040 as taxable business income. It gets added to your $10,000 IRA withdrawal and results in adjusted gross income on line 37 of $16,273.

All of these expenses are a good thing at tax time, because they lower your taxes tremendously. But if you are trying to document income (like for a loan), they go against you, because they reduce your profit. Your home mortgage interest and property taxes are especially high, which has resulted in a high home office deduction. That $31,017 is a large expense, which saved you a ton of taxes, but it almost wipes out your day care business profit.

I often suggest that clients ask loan officers to look at the income on line 29 of the Schedule C. That is your business profit before considering home expenses and yours is $37,767. I think that amount is more representative of your business profitability. The lower profit of only $6,750 is the result of special tax rules that let you deduct home expenses on Schedule C, rather than on Schedule A, like most taxpayers. I'm not sure whether lenders ever go for this argument, but it's worth a try.

Posted on 2010-08-02 06:49:43