@maheshpujara wrote:
Can someone please help answer the follow-up questions I have ? thanks in advance.
Can I deduct the maintenance and cleaning expenses toward the business use of home when home is used as a licensed childcare facility ? if a Cleaner and Gardner takes cash payments, can I still deduct those expenses towards home day care expenses ?
For business use of a home, including as a home day care, see these links.
https://www.irs.gov/taxtopics/tc509
https://www.irs.gov/publications/p587
For general business expenses, see this link,
https://www.irs.gov/forms-pubs/about-publication-535
"To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary."
Furthermore, when you have expenses that apply to a whole house, you must allocate the expense between the home and the business on a percentage basis. If 20% of the home is used for business, then 20% of the expense is a business expense. (See publication 587 for how to calculate the business use percentage on a home day care.)
However, expenses must still be ordinary and necessary. For example, if you have a pool and pay for a pool service, but you never use the pool for the day care (because it's a liability hazard), then none of the pool expense is a day care expense even if you use the home 20% for day care and 20% of your other household expenses are considered deductible business expenses.
So whether a gardener and home cleaning service are deductible as day care expenses depends, in part, on whether or not they are ordinary and necessary expenses for a day care, and if they apply to the portion of the home used for the day care. If you want an exact answer that you can rely on if audited, you would need to hire your own tax professional, we can only explain the rules and make suggestions.
As far as cash payments are concerned, you can deduct business expenses that are paid in cash. You must have your own reliable business records to prove the expense if audited. A reliable record is one that is written down (or put into a spreadsheet) contemporaneous with the expense. The IRS will look much more favorably on records you keep over the course of a year than to a record you make up from memory the night before the audit. If your records are neat and complete, the IRS is likely to believe them, if incomplete and sloppy, you may have a problem. Of course, you can also ask your home services to provide receipts.
However, this does raise a secondary issue. You as a business must issue a 1099-MISC or 1099-NEC form to any other person or business who provides service to your business, if you pay them more than $600 in a calendar year. You must also collect their tax number (EIN or Social security number) and report the payments to the IRS.
https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-o...
Going back to the gardener. If you are a private homeowner, you don't issue a 1099-NEC to the gardener. But if you are a business, you are required to issue a 1099-NEC to the gardener if you pay them more than $600 in a year. I have not considered this situation before. Suppose your gardener charges $100 per week, and your day care home use percentage is 20%. That means your business is paying the gardener $1040 per year, which triggers the requirement to issue a 1099-NEC (only for the portion paid for the business, not the personal use.). I think that's probably the correct way to handle it.
I haven't considered this exact situation before.
@Critter-3 @VolvoGirl what do you think?
