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Old 01-04-2011, 08:58 AM
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TomCopeland TomCopeland is offline
Business Author/Trainer
Join Date: Jun 2010
Location: St. Paul, Minnesota
Posts: 3,060
Default Food Program Income

This is an issue that continues to cause confusion. The IRS writing on this topic has contributed to this confusion. Let's clarify:

Let's say you received $4,000 in Food Program reimbursements (none for your own child). Let's say you spent $5,000 on food.

The IRS has described two different ways to report this on your tax return.

Method #1: Report zero income and $1,000 in food expenses. As you can see, we are only reporting food expenses that exceed the reimbursement. This is called the "netting" method. Net the income and the expenses and report the difference.

Method #2: Report $4,000 as income and $5,000 as a food expense. As you can see, using this method comes out the same as method #1. That is, the provider will pay taxes on $1,000.

Now, if this provider reported zero income and $5,000 as an expense, this would be wrong.

Here's what the IRS Child Care Provider Audit Guide says on this issue:

"If the provider receives reimbursement for food costs through the CACFP or any other program, the provider can report all the reimbursements under the income section of Part I of the Schedule C and then deduct the food expenses in full, which is the recommended method especially when the provider receives a Form 1099 from the program, or the provider can net the amount reimbursed against the food expense. If the provider uses the netting method and the food expense is greater than the reimbursement, then the provider may deduct the excess as a food expense. If the reimbursements exceed the total food expenses, then the provider should report the excess income in Part I on the Schedule C. The netting method is not a preferred method since an Examiner will always be looking for the food reimbursement amounts. When you report the amount separately, the Examiner will more easily be able to account for the payments."

So, the IRS officially recommends that providers use Method #2 - show all the income and all the food expense. I've handled many, many IRS audits of family child care providers and the IRS auditor always wants to see all the income and all the food expenses.

Lisa4kids - What your sponsor is telling you is false. If you forward this email to me I will follow up with them. I think they are confused.
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