Lodging for a relative as a dependent care FSA expense?

[rrpublic]

We paid for lodging (in the form of an AirBNB) to enable my mother in law to provide child care for our infant for two months. Can the cost of the AirBNB be deducted as a dependent care expense (in actuality, be reimbursed by a dependent care FSA)? I note that extra room and board paid for a household employee is deductible, but I am not sure if the same applies for temporary lodging outside our home.

If it is deductible, is this considered a payment to my mother-in-law (who then incurred an equal-amount expense), and should be listed on line 1d of form 2441? Or is it considered only a dependent care expense and reportable only on line 16 of form 2441?

[Critter]

No ... it is NOT allowed.  

[Critter]

You pay mom and what she does with the money is up to her once she reports it on an income tax return.

[Hal_Al]

What are the circumstances that  lodging is needed  to enable a grandparent  to provide child care for our infant for two months?

I cannot envision a circumstance that  would qualify that expenses as day care expense, or even business expense for the day care provider

[rrpublic]

The grandparent normally lives >2000 miles away. We live in a one bedroom apartment and so cannot lodge the grandparent with us. Although Airbnb was not the only option, separate lodging for the grandparent was required.

[Hal_Al]

As the comment says:  You pay mom and what she does with the money is up to her once she reports it on an income tax return. 

So if you pay  her a large amount and SHE pays for the lodging, you may consider the entire amount as day care cost for either the FSA or day care credit. But you may not  pay for the lodging directly and call it day care expense.

But, from a practical standpoint,  the math doesn't workout.  There's a $3000 limit ($6000 for 2 or more kids) for claiming the day care credit and $5000 for FSA.  Grandma would have to declare the entire amount as  income and pay both income tax and self employment tax.  She would not be allowed to deduct the lodging cost, as an expense.

[rrpublic]

Is the lodging cost considered a schedule C expense if the care provided by the grandparent is outside our home? (Which it will be as one parent works from home—another reason to purchase separate lodging)

[TomD8]

No.  You can only deduct "Ordinary and Necessary" business expenses on Schedule C.  The IRS does not consider the cost of care for your children to be an ordinary and necessary business expense.  Childcare is considered a personal expense, not a business expense.

However, you may qualify to take the Child and Dependent Care Credit on your personal tax return.  See this IRS reference for details:  https://www.irs.gov/taxtopics/tc602

The Child and Dependent Care Credit is taken on IRS Form 2441, not on Schedule C.  https://www.irs.gov/pub/irs-pdf/f2441.pdf

[VolvoGirl]

They might mean on the grandparents schedule C to report the income.

[rrpublic]

Yes, thanks, that’s what I meant.

[Hal_Al · Accepted solution]

Lodging would not be  "Ordinary and Necessary" business expenses,  for a day car provider. Your geographic area would be the grandparent's "tax home", for this activity;  so the expense would not qualify as  "out-of-town" business expenses.

A Schedule C day care provider can normally deduct a percentage of  her home rent as a business expenses.  But this lodging is not her home nor is it a business location. I don't think the IRS is not going to allow a vacation rental to be written off as a business expense.

[rrpublic]

That makes sense. Thank you for the detailed explanation.

[TomD8]

Mother-in-law would not report the income on Schedule C as she is not in the business or trade of providing child care.