Mr. and Mrs.
Eotvos (Eotvos) ran a day care out of their house.
There are
special tax rules for a day care provider.
(1) For example, how would you depreciate
your personal house for the day care activity?
The first rule that comes to mind is
the office-in-home, but that rule doesn’t work for a provider. The
office-in-home requires “exclusive” use in order to claim a deduction. By that
standard a provider wouldn’t be able to claim any depreciation, unless one had
a room used only for the day care.
In response, the IRS loosened that rule from “exclusive” to
“regular” use. For example, a provider would use the kitchen, dining room and
bathrooms regularly, making them eligible for depreciation.
Can you claim 100% of the cost of your house?
You already know the answer is “no.” That is what the shift
from “exclusive use” to “regular use” means.
But what percentage do you use?
You probably use hours.
Let’s say you have kids in your house 45 hours a week.
You still spend time cleaning, lesson planning, preparing
meals and so on. Say that it comes to another 14 hours per week.
There are 168 hours in a week. You spend 59 hours on daycare
activities. Seems to me that 35% (59/168) would be reasonable.
(2) If you travel, you likely know about
the per diem rate. This is something the IRS publishes annually, and – in
general – you can deduct this rate for each day you are away-from-home for
business purposes. You do not have to. You can claim actual expenses if you
wish, but you will need to step-up your document retention procedures if you go
that route.
Did you know that there are per diem
rates for a day care provider? Yep, there is a rate for breakfast, lunch and
snack. You can claim the per diem and skip the hassle of segregating how much
of your grocery bill was for the day care and how much was personal.
The IRS
looked at Eotvos’ 2012 through 2014 tax returns. They claimed depreciation on
their house. The Court wanted to see the calculation.
Eotvos
photographed numerous pieces of furniture and furnishings and estimated what
they were worth.
COMMENT: We will not get into Accounting 101 here, but this
is not the way it is done.
The
furnishings they were depreciating – best the Court could tell - included a
battle axe and jewelry.
Folks, there
has to be some connection to a business activity to even start this
conversation. You cannot bring home a pair of Nike sneakers and claim that 35%
of the cost is deductible because you brought them inside the house.
Here is the
Court:
Battle axes were not used as children’s playthings, and their acquisition and maintenance was not in furtherance of the day care business.”
What happens
when you tell the Court silly stuff?
And a witness who can testify with a straight face about the nexus between a battle axe and a day care business earns no credibility.”
This is
going south.
The IRS had
calculated some depreciation, as there was no question that there was a day
care there. Eotvos very much disagreed with the calculation, arguing – among
other things – that the allowable business-use percentage should be 100%.
This blanket assertion, like the battle axe, strains credulity.”
They hit
south and just kept going.
The Court
allowed the IRS-calculated depreciation. The Court however slapped an
accuracy-related penalty on the excess of their depreciation over the IRS
number.
They sort of
brought that upon themselves.
