Adult Foster Care provider receives both tax free and taxable income for her 2 Fosters. Can all Foster care income be treated as taxable so no allocation is required for Sch C expenses and 8829 business use of home? Thanks.
I don't think you can just pick and choose when you want tax exempt income to be taxable and vise versa.
I've done the return both ways - Treating some of the income as Tax-free and allocating the same percentage of expenses and business-use-of home, as well as treating all the income as 100% taxable and not allocating. The client takes a larger loss from the Foster business if I treat everything as Taxable. Which for this W-2 client, is good. There is no documentation from the State for the Tax-free income.
Treating tax free income as taxable really isn't much different than treating taxable income as nontaxable -------------- especially in your case. The logic of the IRS not knowing about the nontaxable payments isn't much different than not reporting income on a tax return because the client never received a 1099 from the payer.
Do not prorate expenses. Calculate the actual expenses paid from each. Add up the expenses that equal the non-taxable income, and subtract that from the total expenses. The remainder would have been paid from a combination of the taxable income and the taxpayer's other resources.
You have to allocate expenses between nontaxable income and taxable income. In adult foster care you are often receiving 2 or more sources of payments for 1 individual - some of those sources are taxable and some are coming through from the government in the form of difficulty of care payments which are nontaxable. It is next to impossible to separate expenses for taxable vs nontaxable sources.
This sounds like one of those EIC maximization schemes. You can't do it.
Possibly we need to get Madoff out of Prison on a temporary leave to aid this person
If all of the expenses exceded both the taxable and non-taxble income for her services, she also used some of her own funds for the additional expenses. I could justify that all of the non-table was used for expenses, and the remainder was paid by the taxable and her own money. How else could everythin have been paid?
Adult foster care consists of caring for adults in the taxpayer's home. Accordingly household expenses are allocated to the business ----------- it isn't a case of having a separate checkbook that only pays for business expenses.
