Author: Howard Tax Prep LLC

Here in our Chicago South Loop Tax Preparation, and our Homewood Il, Tax preparation offices, we specialize in helping taxpayers legally reduce their taxable income, claim every tax deduction they are entitled to, and maximize tax credits. Through our work of helping taxpayers, we’ve come to find that many people often miss the Federal Child and Dependent Care Credit. The Federal child and dependent care tax credit refunds taxpayers a portion of the expenses paid for the care of dependent children and other dependents (qualifying persons). 

Since summer is almost here, we wanted to give you some tips on what you need to do to claim the federal Child and Dependent Care credit if you have children (or disabled siblings/parents that you care for) that you plan on enrolling into a summer DAY camp program (so that you can work, or look for work). You’ll notice that we’ve put emphasis on summer DAY camp programs, as overnight summer camp programs are not eligible for the credit. Below please find some key points to claiming the Federal Child and Dependent Care Credit.

🔶The credit is equal to a percentage (from 35%-20%) of the amount you paid for daycare or summer camp attendance, and daycare throughout the year (up to $6,000 for 2 children, & $3,000 for 1 child). However, if you have 2 qualifying children, and paid expenses of $6,000 for only 1 child, you would be able to use the entire $6,000 to figure your credit, even though you only paid expenses for 1 child. To illustrate, Susan is a single mother earning $40,000 a year and has 2 children ages 8 & 12. The local park district is offering an 8-week summer day camp for $100 a week per child totaling $1,600 ($800 per child). Throughout the year, the 8-year-old goes to an afterschool daycare that charges $85 a week for 40 weeks totaling $3,400. At tax time Susan calculates that she paid a total of $5,000 in dependent care expenses, and her income level entitles her to a 22% reimbursement ($1,100) of the amount paid for care. If Susan has a $4,000 tax liability and was receiving a $500 refund, the $1,100 dollar-or-dollar tax credit will reduce her tax liability to $2,900 and increase her tax refund to $1,600.

🔷You must have earned income. Earned income is defined as W2 Income, rideshare driving, food delivery person, MLM business, self-employment, etc. 

🔶The provider must provide you with their name, EIN (unless it’s a tax-exempt organization like a church or school), and address. 

🔷You must provide your tax professional with the amount paid to the provider PER CHILD. 

🔶The dependent(s) must be age 13 or under. 

🔷You must be the custodial parent. 

🔶There are no minimum or maximum income limits on this credit. 

🔷If your filing status is married filing separately, you must have lived apart from your spouse for the last 6 months of the year. You don’t have to be legally separated, but you must be able to prove that you lived apart from your spouse. 

🔶 Sometimes you can file married filing separately, and the person may not qualify as your dependent for head of household status, earned income credit, etc., but they can still qualify as your person for the Federal Child and dependent care credit tax credit. For example, you left your cheating spouse in May, and you’re the primary caregiver for your disabled sister. Your disabled sister receives a monthly dividend check of $400 from her ownership of Ford stock (left to her by your parents). While your sister isn’t your qualifying dependent because her gross income is more than $4,400, you can still claim the child and dependent care credit for any dependent care expenses that you pay on her behalf. 

Although we’ve given you the basics, this article is not all-inclusive. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Here in our South Loop of Chicago Tax Preparation office, and our Homewood, Il tax preparation office, we specialize in tax preparation for real estate investors, and small business owners. Working with this client base, we come across many general contractors that operate 95% in cash. Although cash only taxpayers are entitled to tax deductions, they (like every other taxpayer) must have proof of income received, and proof of expenses incurred. While in most cases we can help taxpayers reconstruct their income and expenses, in some cases the IRS will deny the expenses due to lack of documentary (paper) evidence. In the tax court case of NNABUGWU C. EZE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, not only did the taxpayer lack documentary evidence for expenses, he also didn’t have proof of income received.

In 2015, and 2016 NNABUGWU C. EZE, owned and operated 2 sole proprietor businesses: a consulting business, and a residential construction business (while we’ll touch on issues related to the consulting business, the main focus of this article will be the residential construction business). “For 2015 he reported taxable income of $3,314 and claimed a refund of $774. For 2016 he reported taxable income of zero and claimed a refund of $744.”¹ For his consulting business, Eze claimed to have generated $142,675 in gross revenue, $30,533 in auto expenses, 2,815 in business travel, and $9,662 in other expenses.² While his auto expenses were high, the return might have avoided audit had Mr. Eze not reported that his construction business spent $99,275 (business expenses) to generate $27,875 in gross revenue. In the court opinion, the court noted that Mr. Eze:

• Described his Schedule C2 business as “home improvement.”
• Allegedly “did handyman, construction, and residential rehabilitation projects for individual customers.”
• Claimed to have written contracts with his customers, but never produced the contracts into evidence.
• Didn’t specify how he was paid by his customers, or what type of arrangements he had with his customers.

The court also noted that:

• There was no proof of electronic or paper (documentary evidence) invoices being submitted to customers.
• There were no bank statements to prove the income or expenses claimed on his schedule C profit and loss.
• None of his alleged customers reported payments to him on Forms 1099-MISC, Miscellaneous Income.
• As in typical fraudulent tax return behavior, the expenses reported on the tax return far exceeded the reported income.

Auto Deductions

When it comes to the business use of a vehicle, one of the best tax deductions for business owners is the ability to deduct either mileage, or actual expenses. In this case, Mr. Eze owned 3 vehicles: “a 2008 Mercedes Benz, a 2002 Ford SUV, and a 2004 Chrysler.”³ Mr. Eze testified that the Mercedes was used 100% in his consulting business; the Ford was used 100% in his residential construction business, and that he used the Chrysler “exclusively for personal and family purposes.” To prove that he drove the business mileage, Mr. Eze submitted a calendar with the places that he allegedly drove to for his consultation business, and a second calendar with drives for his construction business. Although Mr. Eze created the calendars, he couldn’t explain how he was able to remember information from 3-4 years ago. “When asked asked how he kept track of start and finish odometer readings for hundreds of trips, Mr. Eze said that he jotted them down on scraps of paper (since discarded)”⁴ to which the IRS responded kick rocks (okay, they actually said “we do not find that testimony credible”, but we like our version better). Since Mr. Eze couldn’t prove his business mileage (see our video here on how to prove business mileage), the mileage deduction wasn’t allowed.

Construction Expenses

To prove his construction material expenses, Mr. Eze submitted receipts from Home Depot, Lowes, and 84 lumber. While under oath, Mr. Eze stated that all of the purchases were not made by him, but some were made by his wife, and “maybe somebody else.”⁵ We find it odd that Mr. Eze can remember all of his business mileage locations from 4 years prior, but he can’t remember who the “somebody else” was that purchased materials from Home Depot. Some of the issues the court took with Mr. Eze material purchases were as follows:

• All receipts are for cash purchases in excess of $5,000. Mr. Eze said he withdrew the money from his bank, yet he didn’t provide any bank statements, or record that would prove that. ⁶
• He claimed to spend $175,000 for materials for a business that was unprofitable, and he somehow still paid his mortgage, private school tuition, and took care of 2 children. ⁷
• The receipts for materials often show large-volume purchases- on the order of 200 pieces of lumber, 50 sheets of gypsum wallboard, and 100 gallons of paint. These volumes vastly exceeded what would have been needed for the projects shown on petitioner’s mileage log.⁸
• The receipts often show purchases of items that petitioner could not possibly have used in any project that he allegedly undertook during the ensuing months. For example, the receipts show purchases of bathtubs, shower units, and refrigerators, but petitioner could not identify any project that would have required installation of such items. He testified that he made advance purchases of these materials and stored them in his garage until he needed them.⁹
• Petitioner allegedly spent more than $21,000 on tools, but he was unable to explain the function or intended operation of many machines and tools listed on the receipts. He said that he could not remember what these things were used for, having purchased them years ago.¹⁰

As we read further into this case, it was clear to us that Mr. Eze thought that the IRS, and the courts were either stupid, or that they wouldn’t look at the documentation he provided. To illustrate, in one instance, Mr. Eze tried to claim the tuition that he paid for his daughter’s tuition as a business education expenses. He also claimed AT&T cellphone expenses of over $2,000, but the AT&T bills submitted covered tv and internet service. Mr. Eze also submitted payments to cricket wireless, claiming that although he didn’t receive invoices from the company “he knew what he owed each month.”

While social media (TikTok, YouTube, & Facebook video’s) will have you believing that you can magically turn personal expenses into business tax deductions (by simply creating a LLC), the truth is that taxpayers have to prove that they are entitled to any business or personal tax deductions claimed. Although courts do have the power to allow approximations (under the Cohan rule if an expense is reasonable), there must be some factual basis for the estimate, and the deduction must not be subject to increased substantiation rules.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, or business compliance assistance please contact us online, or call our office at 855-743-5765. Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now! Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Author information: Trudy M. Howard is a managing member of Howard Tax Prep LLC, a south loop of Chicago tax preparation and accounting office.

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