Facilities Improvement Fund (FIF): Tax Implications

Learn how Facilities Improvement Fund (FIF) grants impact taxable income for home-based child care providers in this informative webinar. Find out how to calculate taxable income and make informed financial decisions. Presenter: Margie Cangelosi, E.A.

• tax implications
• childcare providers
• taxable income
• financial advice

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1. Facilities Improvement Fund (FIF): Tax Implications A Webinar for Home-Based Child Care Providers

2. Presenter Margie Cangelosi, E.A. MAC Tax Preparation & Payroll Services, LLC 1144 Northwood St NE Grand Rapids, MI 49505 Phone: 616.337.1757 Fax: 1.616.953.8991 margie@mactaxservice.com www.mactaxservice.com

3. Introduction Facilities Improvement Fund grants Licensed Home-Based Child Care Providers Sole Proprietors Schedule C

4. Introduction Informational Only This webinar has been prepared for informational purposes only. The impact of the funding will vary from provider to provider, and this webinar is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any financial transaction. Questions? Questions will be answered after the slides. Webinar is being recorded, so please don t include personal financial information in questions.

5. Presentation Outline Taxable Income and Facilities Improvement Fund grants Examples Tax Forms Depreciation

6. Taxable Income and Facilities Improvement Fund grants

7. Are Facilities Improvement Fund grants taxable income? Facilities Improvement Fund grants are part of your gross income. How you use the grants will determine whether you have TAXABLE income from the grant. This presentation should help you figure that out.

8. Definitions Gross Income: All business income for the year Child Care Expenses: Child-care-only expenses Shared Expenses: Expenses with both child care and personal use Time-Space Percentage: Your business-use-of-home percentage which is calculated based on your square footage and child care hours

9. Net Profit Net Profit: Gross Income Child care Expenses - (Time-Space Percentage x Shared Expenses) = Net Profit Net Profit = Taxable Income As a business owner, you are taxed on your net profit!

10. Examples

11. Assumptions All of the examples that follow assume: 30% time/space percentage 33% total tax rate Social Security + Medicare + federal income tax + state income tax + local income tax $30,000 in FIF grant income during 2023 Your time/space and tax rate are different than these examples! Your tax advisor can help you determine these.

12. Repairs to Child-Care-Only Space Without Grant Income With Grant Income of $30,000 2023 Gross Income 2023 Child Care Expenses 2023 Shared Expenses $50,000 $10,000 $10,000 2023 Gross Income 2023 Child Care Expenses 2023 Shared Expenses $80,000 $40,000 $10,000 Net Profit $50,000 - $10,000 (.3 x $10,000) = $37,000 Net Profit $80,000 - $40,000 (.3 x $10,000) = $37,000 Tax Calculation $37,000 x .33 = $12,210 Tax Calculation $37,000 x .33 = $12,210 In this example, the tax on $30,000 in grant income is $0 (0%).

13. Repairs to Shared Space Without Grant Income With Grant Income of $30,000 2023 Gross Income 2023 Child Care Expenses 2023 Shared Expenses $50,000 $10,000 $10,000 2023 Gross Income 2023 Child Care Expenses 2023 Shared Expenses $80,000 $10,000 $40,000 Net Profit $50,000 - $10,000 (.3 x $10,000) = $37,000 Net Profit $80,000 - $10,000 (.3 x $40,000) = $58,000 Tax Calculation $37,000 x .33 = $12,210 Tax Calculation $58,000 x .33 = $19,140 In this example, the tax on $30,000 in grant income is $6,930 (23.1%).

14. Should I apply? Using grant for repairs to child-care-only space (child care room): You should DEFINITELY apply! You will not pay tax on the grant money. Free money is the best kind of money. Using grant for repairs to shared space (bathroom): The grant will probably increase your taxes. In my opinion, you should apply for it IF you have enough other income to cover the tax. The second example essentially means that the provider received $30,000 worth of bathroom repairs. She only paid $7,000 for them. RECOMMENDED: Use the grant for a child-care-only space, if you can.

15. Planning Ahead for Tax Due You can plan ahead so the tax increase does not cause hardship. CHOICE 1: SAVE Plan to save 40% of the grant amount. Save that amount from other income and set it aside in a savings account. Savings Income from parents or State of Michigan Spouse s income When you file your return, you can use this saved money as necessary to pay your tax obligation and keep the rest. CHOICE 2: ESTIMATED TAX PAYMENTS Make or increase your quarterly estimated tax payments in advance of filing your return. Consult your tax preparer about how to do this.

16. Tax Forms

17. Receiving Form 1099-NEC Form 1099-NEC reports non-employee compensation. You will receive Form 1099-NEC from IFF in the January or February after you receive the grant. Form 1099-NEC will be delivered to you either by mail or online. IFF will also send a copy to the IRS. This form will show your name and your grant income whether the grant money was sent to you or directly to your contractor.

18. Filing Form 1099-NEC Form 1099-NEC reports non-employee compensation. As a business owner, if you pay $600 or more to an individual or a business owned by a sole proprietor or partners, you must file Form 1099-NEC for that contractor. You will almost certainly need to file Form 1099-NEC for your contractor. To do this: You must give IRS Form W-9 to any contractor BEFORE you pay that contractor. Form W-9 will gather the information you need about your contractor: Name Address SSN or EIN The next January, you will prepare Form 1099-NEC yourself or ask your tax preparer to prepare it for you. That form will show the amount you paid to that contractor (including the amount IFF paid on your behalf) Before January 31, you must send a copies to the contractor, the IRS, and the State of Michigan. If you do not file Form 1099-NEC for anyone to whom you pay $600 or more, you cannot deduct the expense and must pay tax on the full amount of the grant.

19. When to Report Income and Expenses Most in-home child care providers are cash-basis taxpayers. Cash-basis taxpayers report: Income in the year they receive it Expenses in the year they pay for those expenses In order to minimize tax due, you will want to SPEND your grant money in the same calendar year as you RECEIVE it.

20. Depreciation

21. What is depreciation? Depreciation is an accounting method that allocates the cost of an asset over it s useful life. The useful life is determined by the IRS. Example: According to the IRS, the useful life of a computer is 5 years. You buy a new laptop on January 1, 2023 for $3,000. You deduct $600 on your 2023 return $600 on your 2024 return $600 on your 2025 return $600 on your 2026 return $600 on your 2027 return

22. What assets are depreciable? The following may be depreciable: Any object or project that will be used for more than one year and costs $2,500 or more (furniture, equipment, bathroom remodel, etc.) Improvements (not repairs) Additions (add square footage to your business property) How is a repair different from an improvement? A repair fixes your current property to keep it at the same value. Painting Plumbing repairs Replacing less than of the doors or windows An improvement increases the value of your property. Kitchen remodel Replacing all windows Roof replacement

23. Choices For most depreciable assets, you can make a choice to deduct the full cost of the expense in the year of purchase instead of depreciating it. Special/bonus depreciation Section 179 deduction When you do your taxes, your tax preparer should talk to you about each depreciable item that you purchased during the year so you can choose whether to depreciate or expense that item. Most of the time you ll want to deduct the full cost in the year of purchase to reduce your tax!

24. The Exception If your replace more than of the windows on your house, it must be depreciated. OUCH: This improvement must be depreciated over 39 years! You receive a grant of $30,000 and pay $30,000 for all new windows in January 2023. Your time/space percentage is 30%. You can only deduct $231 on your 2023 tax return. You will pay tax on $29,769 for 2023. At 33% tax, you will pay $9,824 in tax. RECOMMENDED: Use the grant for anything except replacing more than the windows in your house!

25. Questions?