Business took loss and cant claim dependent care

[shadeylady7]

I own an LLC that took a loss and I didn't make income.  Even though I didn't have an "income", I was working and had to send my kids to pre-school.  Turbo tax won't let me claim dependent care because I don't show an income.  Is that right?

[WillK]

Unfortunately you are correct. 

Per the IRS: " To be able to claim the credit for child and dependent care expenses, you must file Form 1040, Form 1040A, or Form 1040NR, not Form 1040EZ or Form 1040NR-EZ, and meet all the following tests.

1. The care must be for one or more qualifying persons who are identified on Form 2441. (See Qualifying Person Test.)

2. You (and your spouse if filing jointly) must have earned income during the year. (However, see Rule for student-spouse or spouse not able to care for self under Earned Income Test, later.)

3. You must pay child and dependent care expenses so you (and your spouse if filing jointly) can work or look for work. (See Work-Related Expense Test, later.)

4. You must make payments for child and dependent care to someone you (and your spouse) cannot claim as a dependent. If you make payments to your child, he or she cannot be your dependent and must be age 19 or older by the end of the year. You cannot make payments to:

   1. Your spouse, or

   2. The parent of your qualifying person if your qualifying person is your child and under age 13.

   See Payments to Relatives or Dependents under Work-Related Expense Test, later.

5. Your filing status may be single, head of household, or qualifying widow(er) with dependent child. If you are married, you must file a joint return, unless an exception applies to you. See Joint Return Test, later.

6. You must identify the care provider on your tax return. (See Provider Identification Test, later.)

7. If you exclude or deduct dependent care benefits provided by a dependent care benefit plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses (generally, $3,000 if one qualifying person was cared for or $6,000 if two or more qualifying persons were cared for). (If two or more qualifying persons were cared for, the amount you exclude or deduct will always be less than the dollar limit, since the total amount you can exclude or deduct is limited to $5,000. See Reduced Dollar Limitunder How To Figure the Credit, later.)

Since you have a business loss, your are not able to show earned income (business profit). With that scenario, you would not be able to claim dependent care. 

[ahock]

just to follow up on question below. My wife is a sole proprietor and incur a business loss. But we are filling jointly and I have a job which sponsor the dependent care benefit. Does this mean we cant claim for the DCB expenses we had?

Thanks

[Critter-3]

But we are filling jointly and I have a job which sponsor the dependent care benefit. Does this mean we cant claim for the DCB expenses we had?   That is correct.  The program will complete this for you just make sure to enter/complete the day care credit section. 

[NCperson]

@ahock - you are appending to an old post..... not sure what year you are asking about.  did you contribute to a dependent care FSA???????

if not,  unique to 2021, the dependent care tax credit is a refundable credit.... normally it's  a non-refundable credit.

a non-refundable credit can't reduce Line 22 of Form 1040 below zero, so if you have no income (because your business took a loss), your tax liabiltiy is zero and there is no value to the tax credit.

But for 2021, because of ARPA, passed by Congress, they said for 2021, that didn't matter, you get the credit even if Line 22 is zero.... that is a 'refundable credit'.

[NCperson]

@Critter-3 - can you please read my response vs. your response...... I am not familar with how a dependent care FSA would work if there was no taxable income, but why can't the expenses be taken as a refundable credit without regard to the FSA  (again because of ARPA) - I am out of my league on this one. 

[ahock]

this is for 2021 by the way. I was searching for answers hence I appended on old thread

For my question its just a dependent care for child care and NOT FSA. Basically I have elected to deduct pre tax in my salary and do reimbursements. My wife had a business but incur a loss. Am I allowed to claim for it even if my wife business incur a loss? My understanding is yes since I still have my earned income.

[Critter-3]

BOTH parents must have taxable income to take the 2441 credit but since they used the FSA they must compete the 2441 so the FSA contribution listed in box 10 on the W-2  can be added back into income as it is not allowed.

[NCperson]

@Critter-3 - yup, I see it... on form 2441, you have to use the lesser of 1) H's earned income, 2) W's earned income (presumably zero or negative in this case) or 3) AGI to determine the credit.......

@shadeylady7 you may want to print out form 2441 and just see how the mechanics on lines 3-9 work - it's not that hard, but it does turn out the tax credit is zero. 

[ahock]

but I have income right? My wife also work although had to incur a loss. DOes that disqualify us right away to claim for DCB?

[NCperson]

@ahock yes, it does.  again work through Form 2441 manually - especially lines 4,5, and 6

[SweetieJean]

and be aware that you are required to claim all of your self-employment expenses.