Daycare Tax Tips

Determining Your Income Tax Deductions -- Direct Expenses

2008-01-07T15:42:00.001-08:00

Legal Organization of Your Daycare

2008-01-07T15:25:00.000-08:00

Once you decide you want to open a business, you need to determine your legal organization. The most common choice for a single business owner is a sole proprietorship. This is the easiest option to establish and maintain.

IRS Publication 583 defines a sole proprietorship as the simplest form of business organization. "The business has no existence apart from you, the owner. Its liabilities are your personal liabilities and you undertake the risks of the business for all assets owned, whether used in the business or personally owned."

This means that you are ultimately responsible and liable for any business debt and your personal assets can be used to cover a business debt. This unlimited liability is the greatest negative aspect associated with this form of business organization.

As a small business owner, you may want to do some research into the other legal entities such as a Limited Liability Corporation or an S Corporation. Both of these entities provide limited liability, which allows you to separate from your business. Thus, your personal assets can realize some protection in the event of a business debt or lawsuit.

Each option has its own income tax ramifications, so you may want to do some research before you decide. There are some IRS publications that can assist you with this decision. You can order Publication 334, 541, 542, and 589 by calling the IRS at 1-800-829-3676. It is also a good idea to consult a lawyer or accountant.

Recordkeeping Tips

2008-01-07T15:20:00.000-08:00

As a business owner, you need to keep complete and accurate records. This is required by the Internal Revenue Service, but it can also help you save money by reducing your taxes.

Try to make it a habit to request receipts for everything you purchase and keep them all in one envelope. Once a week, sit down with your receipts and your checkbook.

Some people find it helpful to create a simple filing system using manila folders and loose-leaf paper. Under this system, folders would be labeled by month. Transactions are recorded on 8 1/2" by 11" sheets of paper placed in the front of each folder and all supporting documentation gets filed inside of it. You should include one sheet of paper for income and one for expenses. Be sure to staple them all together and prepare this package for the front of every folder.

For every expense, list the date, who was paid, the item purchased, the amount and the method of payment. Separate your receipts into each category, record them and file in the appropriate folder.

For income, list the date it was received, the source, the amount received, the method of payment, reason for payment and reference number.

At the end of the month add up the amounts listed on your sheets of paper. At the end of the year simply compile the totals from each month to arrive at your final numbers.

Once you have completed the year, file everything away in large 10" by 13" clasp envelopes marked with the tax year and keep in a safe place. You may reuse your emptied folders or start over again with new ones.

Recording everything on a weekly basis will allow you to create an organized recordkeeping system for your business and will support your claims in the event of an audit.