Family Daycare Providers Business Home Use? Look what special tax benefits the IRS has for you!
A taxpayer who is in the business of providing family daycare in their home may deduct the ordinary and necessary expenses of their business. Therefore, we thought it was in our readers best interest to learn about these benefits. In both parts of this short blog series, we will address each of the two primary tax deductions that include the business use of their home and the cost of providing meals and snacks to children in their care. The following is a rundown on deductible business expenses for home day care providers.
Daycare Providers Business Home Use
Prorated Use of the Home Tax Deduction
Generally, to be able to take a deduction for business use of the home, the tax law requires the business portion be exclusively that – for business. However, the tax law carves out a special allowance for day care facilities, by allowing for prorated use. However, there is an exception to the exclusive use requirement. That exception applies only when the owner or the operator of the day care facility:
- Has applied for a license, certification, registration or approval as a day care center or a family or group care home under the provisions of any applicable state law; therefore, there can be no rejection of the application;
- Has been granted a license without being revoked, certification, registration or approval as a day care center or a family or group day care home under the provisions of any applicable state law; or
- Is exempt from having a license, certification, registration or approval as a day care center or a family or group day care home under the provisions of any applicable state law.
Daycare Facility Exception
The day care facility exception does not apply to the services that are primarily educational or instructional in nature (e.g., musical instruction). Likewise, the exception does apply when the services are primarily custodial and when educational, development or enrichment activities are minor when it comes to custodial services. Therefore, the determination depends generally on the facts and circumstances of each particular case.
Day Care Facility Business Use
When calculating the percentage of daycare providers business home use, both the use of space to operate the day care business and the amount of time that the space is in use to provide day care are factors. This includes preparation and cleaning time.
Example – Edna uses her living room, kitchen and bathroom ten hours a day, five days a week, to provide licensed day care services. The home is 2,400 square feet, and the living room, kitchen and bathroom are a combined 1,400 square feet. The determination of Edna’s percentage use of her home for business is as follows:
Although the business use of the home deduction cannot exceed the gross income of the business, and there is an order in which the deductions are allowed while applying the gross income limitation, the deduction is generally made up of the following prorated expenses:
For an Owned Home:
- Mortgage interest
- Home taxes
- Utilities
- Repairs
- Homeowner’s insurance
- Depreciation
For a Rented Home
- Rent
- Utilities
- Repairs
- Renter’s insurance
Example: Edna, in our prior example, provides family day care services out of her rented home, for which she pays $2,200 a month in rent and $3,100 for utilities for the year. Here, the determination of her business use of the home deduction is as follows:
Rent ($2,200 x 12)……… $26,400
Utilities………………………….. 3,100
Total………………………….. $29,500
The prorated amount (her deduction for the year) is $5,121 (17.36% of $29,500)
Exclusive Use of Home for a Day Care Facilty
Some providers have rooms such as play rooms or sleeping rooms set aside that are in use exclusively for their business. In these cases, a separate calculation for the exclusive-use space should be made using 100% use. furthermore, that amount should be added to the deduction for the prorated portion of the home.
Other Tax Benefits Daycare Providers Enjoy
In our next blog, we will discuss family day care providers and how they may deduct the cost of meals given to the children in their care. We will touch on separating the cost of food between day care use versus for personal use, the recordkeeping nightmare. We will also discuss the other tax deductions available to daycare providers. These include: the Standard Meal and Snack Rates for Day Care Providers, Meal Deduction, how the IRS treats Meal Reimbursements and Subsidies, the Tax helps for unemancipated children cared for in your home, and switching from simplified to substanciated rates year over year.
Day Care Business Home Use Deduction Questions?
Daycare providers business home use, like we said, can be a recordkeeping nightmare. As you can see, the tax side of providing family day care can be daunting. Therefore, do you have questions regarding recordkeeping and tax-filing issues for your day care? Call Alex Franch, BS EA at 781.849.7200 or email the office at contactus@worthtax.com to secure help with your small business accounting needs. Also, you can book an appointment online here and you can meet with any of our tax experts.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies.
Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA). He holds a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.
Alex Franch is a registered representative of, and offers securities and investment advisory services through, Commonwealth Financial Network. He is a registered broker-dealer, Member FINRA/SIPC.
Sources and Resources for Daycare Providers and Other Small Business Owners
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