Home Daycare Tax Deduction
If you operate a Home Daycare Facility in your residence, you may qualify for Tax Deductions if you meet the IRS Requirements.
If you use space in your home on a regular basis for providing daycare for children, adults who are 65 or older, or for physically or mentally disabled people, you can deduct the household expenses.
Home Daycare Facility Requirements
To qualify for the daycare facility use rule, you must meet both of the following requirements:
- 1. You must be in the trade or business for providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.
- 2. You must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. You fail to meet this requirement if your application was rejected or your license or other authorization was revoked.
Determining the Home Daycare Tax Deduction
The first step is to determine the business percentage of your home that is used for daycare. If you regularly use part of your home for daycare, figure what part is used for daycare, as explained in our “Home Business Percentage Use” section of this website.
If you use the part of your home exclusively for daycare, you may deduct all the allocable expenses, subject to the deduction limit. If the use of part of your home is regular, but not exclusive, you will need to figure what part of available time you actually use it for business.
A room that is available for use throughout each business day is considered to be used for daycare throughout each business day. You do not have to keep records to show the specific hours the area was used for business. You may use the area occasionally for personal reasons. However, a room you use only occasionally for business does not qualify for the deduction.
To determine how much you may deduct you will need to multiply the total costs of your daycare facility by two fractions:
- 1. The total square footage in the home that is available for daycare use throughout each business day and regularly so used, divided by the total square footage of the home.
- 2. The total hours in the year that the daycare uses the home divided by the total number of hours in a year (8760, or 365 x 24) or 8784 for a leap year.
The resulting fraction is the portion of home expenses that can be deducted on the tax return for the daycare business.
Home daycare example: You operate a daycare center at home from 7 a.m. to 5 p.m., five days a week, 250 days a year for a total of 2,500 business use hours (11 hours x 250 days). Your annual home expenses total $17,000 ($7,000 for interest and taxes, $6,000 for utilities, garbage, insurance and maintenance, and $4,000 for depreciation). The total floor area of your home is 3,000 square feet, 2,000 of which is used for daycare. The percentage of daycare use is calculated as follows:
2,000 sq ft / 3,000 sq ft = 66.67% sq footage used for daycare.
2,500 hours / 8,760 hours = 28.84% of hours used for business use.
$17,000 x 66.67% x 28.84% = $3,268.70. The full $3,268.70 is deductible only if net income generated from the daycare facility is at least that much.
Other Rooms You May Include
Utility rooms, such as laundry, storage rooms, and the garage, may be counted as part of the home daycare business area. In once case the Tax Court ruled against the IRS who had argued that because children were not allowed in these areas, the space could not be considered as used for business.
The Tax Court disagreed. The laundry room was used to wash the children’s clothes; the storage room and garage were used to store play items and equipment. Thus, the space was considered as used for child care even though the rooms were off limits to the children.
List of Home Daycare Tax Deductions
Below are a list of Tax Deductions if you have a Home Daycare:
- Daycare Food
- Daycare Supplies
As with any small business, keeping accurate records is a must if you have a home daycare. Maintaining your income and expenses on a monthly basis will make filing your tax return easier once tax time arrives.