Understanding Taxes for a small homeschool business

It’s tax season and I’ve been getting several emails from homeschool business owners, especially Classical Conversations directors, about how to fill out their tax returns.

The IRS has a terrific website called Understanding Taxes that explains how to fill out a simple business tax return.

It’s quite good. I’ve used their simulations when I taught personal finance at my homeschool co-op

Visit these websites to learn how to fill out your Schedule C Business Income and Loss.

Understanding Taxes home page

Simulation of filing a simple business tax return using Schedule C-EZ

Simulation of filing a simple business tax return with a 1099-MISC (this simulation would be helpful for a Classical Conversation tutor who receives a 1099-MISC).

 

You could also try searching Youtube for helpful videos on preparing a business tax return. Here’s one I found:
How to Fill Out Schedule C for Business Taxes He goes over the Schedule C line by line in about 20 minutes.

 

I hope that helps,

Carol Topp, CPA

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Can my landlord get a tax deduction for the free rent he gives us?

I have a few questions for you about a tax deduction for our “landlord.” We just received 501(c)(3) tax exempt status form the IRS. Does this mean that our landlord can claim a deduction the reduced rent she gave us?  RW

 

Dear RW,

Donations of cash or physical goods to your organization are tax deductible charitable donations.  But donations of services or use of leased property is not a tax deduction.

If your landlord gave your homeschool organization free or reduced rent, that is not a tax deductible donation for the landlord. Sorry.

Here are some articles that explain the IRS rules on donating leased space.
Can landlords take a tax-deduction for the donation of leased space?

When a property owner transfers title to a charity of all or part of real property, the owner can generally take a tax deduction for the gift.  However, offering a charity leased space for free or at a reduced rate is a not a gift of an ownership interest and is not considered deductible by the IRS.

Landlords do a good deed by donating leased space to a charity but they are not permitted to receive a tax benefit for their action.

Tax treatment of the provision of rent free

For this reason, donations of services or loans of property to a charity do not qualify as gifts because they do not transfer a property interest to the charity. They simply allow the charity to use the property of the donor, or to benefit from the donor’s services, free of charge.

Here’s the official word from the IRS from Revenue Ruling 70-477.

“a contribution, made after July 31, 1969, to a charitable organization of the right to use property is treated as a contribution of less than the entire interest in the property and does not give rise to a deduction.”

In other words, if someone donates a building (i.e. “the entire interest in the property” ) to a charity, it is a tax deductible donation. But if the contribution is the right to use the property, then there is no tax deductible donation.

Carol Topp, CPA

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Accepting contributions for a needy family

Hi Carol,
We just suddenly lost a dad from our homeschool co-op.  He leaves a wife and 6 children.  We have been receiving donations for them left and right through PayPal.  We will also start receiving checks from various people and churches.
As a 501c3 organization, what is our responsibility with donation letters and such?  For PayPal payments, I’ve been forwarding the receipt to the donor, thanking them for their donation and reminding them to hold on to their PayPal receipt for tax purposes as we are a 501c3 and their donation is tax deductible.
MG in NJ

So sorry for the loss of one of your fathers. How horribly sad.

What are you doing with these contributions? Are you passing them along to the family who lost their father/husband? I imagine that you are and that is very kind of you, but then these are not tax deductible donations. These contributions are gifts to the family (funneled through your co-op). Gifts to an individual family are NOT tax deductible donations to the donor.

The IRS rules for tax deductible donations are quite clear: contributions earmarked for a certain individual (or family) including those that are needy or worthy are not deductible.

IRS Publication 526

Contributions to Individuals

You can’t deduct contributions to specific individuals, including the following.

Contributions to individuals who are needy or worthy. You can’t deduct these contributions even if you make them to a qualified organization for the benefit of a specific person. But you can deduct a contribution to a qualified organization that helps needy or worthy individuals if you don’t indicate that your contribution is for a specific person.

The reason the donors funneled these gifts through your homeschool organization is that they want a tax deductible receipt, but you should not give the donors a tax deductible receipt for these gifts that are designated to go to the specific family.

My advice at this point is to thank people for their contributions, but do not give out tax deductible receipts. Some nonprofit experts advise that you tell the donors that their gift is not a tax-deductible contribution.

 

P.S. You might want to contact The Homeschool Foundation, a benevolent fund established by Home School Legal Defense Association (HSLDA). They have a fund just for widows to help purchase curriculum.

Carol Topp, CPA
HomeschoolCPA.com

Are violin lessons and ballet classes tax deductions?

Hi Carol, I just discovered your great website.
I pay several people for private instruction for my child: violin lessons by a private teacher, gymnastics, ballet in a nonprofit ballet school.
Can I send a 1099-MISC to any of these people or organizations?
I’d like to keep my tax liability as low as possible.
Thanks for any guidance you can provide.
Kimberly

Kimberly,

The Form 1099-MISC is to be given to a person who provide services to your trade or business. You do not give 1099-MISC to people you hire for your personal expenses (violin lessons for your children, etc).

Here’s what the IRS website says:

  • Report payments made in the course of a trade or business to a person who is not an employee or to an unincorporated business. (my emphasis added)
  • Report payments of $10 or more in gross royalties or $600 or more in rents or compensation. Report payment information to the IRS and the person or business that received the payment.

Your personal expenses (violin lessons, gymnastics, ballet) are not tax deductible expenses.

I hope that helps,

Carol Topp, CPA
HomeschoolCPA.com

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Are homeschool co-op fees childcare tax deductions?

littlegirl_in_pink

Carol,

A parent asked me for our tax ID number to give to her accountant for listing our tuition as a childcare expense. Is this common practice? Is it the EIN that she’s asking for? Should I give it to the accountant directly? We are 501(c)(3) state-registered corporation.

–Lisa C

 

Lisa,

The parent is asking for your EIN (Employer Identification Number), but the tuition and fees she pays to your homeschool program are (probably) not tax deductible.

IRS Pub 503 Child and Dependent Care expenses make it clear that tuition/education expenses are not child care and are not tax deductible.

Expenses to attend kindergarten or a higher grade are not expenses for care. Do not use these expenses to figure your credit.
However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care.
Summer school and tutoring programs are not for care.

If the child was in preschool at your co-op, then, maybe, the portion for the child’s preschool expenses could be childcare. By the way you may need to check your state laws to see if you are required to be licensed as a daycare.

But the child car tax deduction is only allowed for the parent to work. Was this mom going to work while her preschool daughter was at co-op? If yes, then it’s childcare; if no, then it’s not childcare and not eligible for a tax deduction.

I recommend that you not give her your EIN and explain that her tuition and fees to your homeschool organization are not child care expenses and not tax deductible.

In reality, she could find your EIN on the internet if she knew where to look, but it’s more important that you explain that tuition and fees are not tax deductible child care expenses.

Carol Topp, CPA
HomeschoolCPA.com

 

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Tax breaks for education in some states

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I’m frequently asked about tax deductions for homeschooling expenses. The US federal government does not have any tax deductions or tax credits for K-12 education expenses, but some states do offer tax credits or deductions.

This document has a description of state tax breaks for educational expenses. The document is dated 2011.

http://www.house.leg.state.mn.us/hrd/pubs/educcred.pdf

There is an 2014 update to the document at http://www.house.leg.state.mn.us/hrd/pubs/ss/sseducdc.pdf.

It states:

To date, 14 states in addition to Minnesota provide income tax benefits for education-related expenses.
Alabama, Arizona, Florida, Georgia, Indiana,Iowa, Kansas, Louisiana, New Hampshire, Oklahoma, Pennsylvania, Rhode Island, South Carolina, and Virginia all provide tax credits for contributions to nonprofit school tuition organizations that operate like charities; Puerto Rico also allows a similar credit.
Kansas, New Hampshire, Pennsylvania, and Rhode Island allow their credits only for corporate taxpayers; the Florida credit is allowed against corporate, insurance premiums, severance, alcoholic beverage taxes, and sales taxes for certain taxpayers; and Alabama, Arizona, Georgia, Indiana,Iowa, Louisiana, Oklahoma, South Carolina, and Virginia allow credits for both individual and corporate taxpayers.

Arizona also allows credits for individuals who pay extracurricular public school fees and who contribute to character education programs at public schools, and Pennsylvania also allows a corporate credit for contributions to innovative public school programs.

Louisiana allows individuals to claim a tax deduction for qualified education expenses.
Illinois, Iowa and Wisconsin provide individuals with nonrefundable tax credits for qualified education expenses, and Alabama allows a refundable credit for tuition expenses of students leaving state-designated low-performance schools. Iowa’s credit applies to tuition for children attending accredited not-for-profit K-12 schools, and Louisiana’s deduction applies to public, private, and homeschool expenses.

Courts in Arizona, Illinois, Indiana, Iowa and New Hampshire have upheld the permissibility of these education credits.

Did you find your state listed? Ask your tax professional if your homeschool expenses qualify for a tax credit or deduction on your state income tax return.

And always remember:

Tax deductions and credits just reduce the tax you pay.

Your state government is not putting cash in your hand to purchase books. You must do that first.

Then you pay a little bit less in tax via a tax deduction.

Taxes and your homeschool expenses

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I am pretty new to homeschooling and tax returns. As a matter of fact I have never incorporated my homeschooling into my tax returns since starting homeschool in 2013. What I would be interested in is finding out what are my to-do’s and to-donts when it comes to my household’s tax return and our homeschooling. Please let me know if you can help educate myself and potentially others.

 

Well, your homeschooling expenses are not included on your federal tax return at all, so there is nothing to be concerned about.

Homeschooling expenses are personal expenses, like groceries or clothes, and are not tax deductible on the US federal income tax return.

You cannot deduct your groceries or your clothes on your tax return and you cannot deduct your homeschooling expenses on your federal income tax return.

A few states may allow a tax deduction, a tax credit or an educational saving account. I cover details in this podcast episode:

Any Tax Breaks for Homeschoolers? Dollars and Sense Show podcast Episode 11

Carol Topp, CPA

 

 

Money Myths Homeschool Moms Believe. Dollars and Sense Show #13

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In this episode of the Dollars and Sense Show host Carol Topp and her guest Susan Raber of AtHomeAndSchool.com discuss money myths that homeschool moms believe.

Listen to the show here

Do any of you, like me, have curriculum sitting on your shelf, that, if you are honest with yourself, you will probably never use?

I want to share some experiences I’ve learned about money and homeschooling.  I call it the Five Money Myths that Homeschool Moms Believe

Myth #1:  Just a Little More Money Will Solve All My Problems

Truth: Problem is not lack of money, but lack of contentment

Contentment Robbers: mail order catalogs, magazines, malls, etc… For homeschoolers the list is similar:

  • homeschool catalogs,
  • homeschool curriculum fairs,
  • homeschooling web sites and forums,
  • homeschooling magazines
  • and even (gasp) other homeschoolers

I personally do not look at the Sunday sale ads.  I didn’t know I needed stuff until I saw the ads!  So I stopped looking. Maybe it’s the same with you.  What are your contentment robbers?

Here’s some advice:

  1. Only look at catalogs when you have a specific need
  2. Use a shopping list at curriculum fairs. If it’s not on the list, you don’t need it.

Myth # 2:  I Need …..

Truth:  Wants are different from needs

Do you think that you just have to have a certain item (whether you need it or not) just because another homeschooler has it?

Here are some tips:

  1. Don’t buy things sight unseen
  2. Don’t buy more than one year of a new text

Myth # 3:  It was on sale; I saved a lot of money!

Truth:  Money is not saved unless there is a deposit into the bank!

As yourself: Is the sale price a good value?

My daughter was looking at an audio book catalog with deeply discounted prices.  “How can they sell these audio books so cheaply?” she asked me. “The original price was $500 and they’ll sell it for $150.” Perhaps, it never sold at $500 and it’s only worth $150. Is the $150 a good value?

Tip: If you buy something on sale, put the difference in a savings account.  Use the savings for future homeschool needs.

 

Tune in for the next Dollars and Sense show on April 10, 2014 when Carol and Susan will discuss More Money Myths that Homeschool Moms Believe.

 

Teens and taxes. Dollars and Sense Show #12

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In this episode of the Dollars and Sense Show host Carol Topp discusses taxes and teenagers.

Listen to the show here

Show Notes:

 A teenager files their own tax return!  Do NOT add your child’s income to your tax return.

You can still claim your teenager as your dependent. They check a box stating they are claimed as a dependent on your tax return.

Major taxes affecting teenagers: earned income, unearned income, and self-employment tax.

 Earned Income from a job or micro business (including babysitting). Federal income tax is owed if earned income is more than $6,100 (in 2013)

 Unearned Income: interest, dividends, capital gains on taxable accounts in the student’s name. Federal income tax is owed if unearned income is more than $1,000. Between $1,00 and $2,00 unearned income is taxed at child’s tax rate. More than $2,000 unearned income is taxed at parent’s rate  on Form 8615 (“Kiddie tax”)

Self-Employment Tax

Same as Social Security and Medicare for self-employed people. 15.3% of profit over $400. Unadjusted since 1954 (adjusted would be $6,250). Schedule SE attached to Form 1040. Reported on Line 56 under Other Taxes on back of Form 1040. (the “hidden” tax)

Example: $5,000 profit earned by single teenager. Income tax $0. SE tax $706!

If you’d like to see this changed, visit MicroBusinessForTeens.com/eliminate-tax-on-teen-entrepreneurs for a position paper you can share with your congressman.

 Exception to SE tax for teenage Household Employee: Students under age 18 working in or around an individual’s home is a household employee are not subject to SE tax. Report wages on Form 1040 Line 7 with “HSH” as note. Examples: babysitting, lawn care, house cleaner

 Teenagers scammed: Treated as independent contractor instead of employee.
Signs: Paycheck with no SS/Medicare withheld. Paid in cash. 1099MISC not W-2.
Action: Complain to employer. File complaint with IRS (Form SS-8) and Form 8919 to pay half SS/Medicare.

Resources

Teens and Taxes ebook by Carol Topp, CPA available at TeensandTaxes.com
Money and Taxes in a Micro Business by Carol Topp, CPA available at MicroBusinessForTeens.com
IRS Understanding Taxes website http://apps.irs.gov/app/UnderstandingTaxes

 

Tune in for the next Dollars and Sense show on March 27, 2014 when Carol will discuss 5 Money Myths that homeschool moms believe.

 

Any tax breaks for homeschoolers? Dollars and Sense Show #11

DollarsAndSenseShow11

In this episode of the Dollars and Sense Show host Carol Topp discusses tax breaks for homeschoolers.

Listen to the show here

Show Notes:

There is no federal tax credit or deduction for homeschool expenses

Some states do allow a deduction, usually on state income tax. Proposed in Ohio: Property tax deduction for homeschool expenses

Arizona, Illinois, Indiana, Iowa, Louisiana and Minnesota and all have some sort of tax break for individuals. The credit is available to any public or private school student, so it is not unique to homeschoolers.

Links:
This website has a comparison of state programs that offer a tax credits for educational expenses or for a donation to a scholarship fund. It was last updated in September 2011. http://www.house.leg.state.mn.us/hrd/pubs/educcred.pdf

Home School Legal Defense Association has an explanation of some states’ tax breaks or credits:http://www.hslda.org/docs/nche/000010/200504150.asp

Ann Zeise of A to Z Home’s Cool has a great, detailed and lengthy post of tax write-offs for homeschoolers:
http://a2zhomeschooling.com/laws/homeschool_laws_legalities/tax_writeoff_educational_writeoffs/

 Disadvantages of tax breaks for homeschool expenses:
We have an overly complex tax system already
Fear of government regulation, proof of homeschooling, etc.

 

Remember tax deductions and credits just reduce the tax you pay.

Your state government is not putting cash in your hand to purchase books. You must do that first.

Then you pay a little bit less in tax via a tax deduction.

 

Tax breaks for parents

  • Exemptions: $3,900 per person in 2013.
  • Child tax credit. $1,000 per child. Ends when child turns 17, not 18! Law says child “was under age 17 at the end of the year.”
  • Earned Income Credit
  • Child care deduction (if working for pay)
  • Educator Expense deduction (not allowed for homeschoolers because the teacher-parent is not employed by a school for 900 hours in a school year)
    • There is a bill in the US House of Representatives to allow home school parents to take this deduction. HR 1850 sponsored by Rep Tom Cole, R-OK.

Education credits/deduction

  • American Opportunity Credit (used to be called the Hope Credit) up to $2,500 per student. Tuition, books and equipment. First 4 years of undergraduate college.
  • Lifetime Learning Credit: up to $2,000 per tax return. Tuition, books and equipment. Undergrad, graduate and courses to acquire or improve job skills.
  • Tuition/fees deduction: Up to $4,000. Cannot claim tuition deduction and AOC/Lifetime for same student in same year.
  • Student loan interest deduction. $2,500 deduction.
  • Some states allow 529 deduction (Ohio)

College savings incentive

  • 529 plans offered in many states. Known an Qualified Tuition Programs (QTP). Tax free earnings when used for tuition, books, room and board.
  • Coverdell Education Saving Account (also known as Education IRA). $2,000 contribution per beneficiary per year. Tax free earnings when used for tuition, books, room and board. Can also be used for k-12 expenses.

 

Tune in for the next Dollars and Sense show on DATE when Carol will discuss NEXT EPISODE TITLE