Tax Advantages for Home Daycares

Opening a home-based daycare service may be one of the best tax moves you can make. The IRS allows some special considerations on Schedule C for home daycares which may allow you to deduct things you never considered deducting. Knowing which tax breaks to take and which receipts to keep will be key factors in maximizing your deductions against daycare income.

Home Office Deduction

IRS Form 8829, "Business Use of Your Home," provides more deduction opportunities for a home-based daycare service than for any other business type. While other home-based businesses may only deduct expenses for space that is used exclusively for business purposes, the home daycare provider is allowed to take a deduction for part or all of a home used by the family during non-business hours. Business use percentage is based on hours used for business as opposed to personal use. The IRS is also lenient about computing that ratio without the need for written records showing exact daycare occupancy. Types of deductions to be taken on Form 8829 include home maintenance, repairs, utilities, and insurance.

To take advantage of these special opportunities, the daycare must either hold a current license, a certificate or registration, or be exempted from a licensing requirement by local or state government. The facility must provide daycare or group home services to minor children, or to elderly or disabled individuals.

Snacks and Meals

The IRS also allows a special deduction type for snacks and meals provided by home daycares that do not receive USDA food subsidies. Daycare providers may deduct the actual cost of food purchased for daycare operations or take a deduction based on prescribed standard meal and snack rates. Detailed meal records are not required if actual food costs are deducted using grocery receipts.The standard rates do not vary by location, except for daycare providers in Alaska and Hawaii. To claim the standard rates, a provider must keep detailed records showing each child's name, the hours of service for each day, and which meals and snacks were served. Three meals and two snacks at standard rates for the lower 48 states currently total about $6.50 per day, which may be more than you are able to deduct per child using actual expenses.

Toys, Games and Supplies

Daycare providers often borrow toys, games and supplies from around the house to use in daycare operations. Due to heavy use, these items usually get broken or destroyed very quickly, resulting in unhappy family members and/or requiring the purchase of new items for personal use. A better solution would be to buy items specifically for daycare use so you can deduct their cost on Schedule C. If you watch your own children while providing paid daycare to others, your children may legitimately play with the daycare's toys during daycare hours and you can still deduct their cost. All other supplies, such as pencils, crayons, paper plates, towels, toilet paper and cleaners should be purchased separately from home supplies as well, for easy identification of tax deductible expenses.

Depreciation

One daycare-specific tax advantage is your ability to take a depreciation deduction on all or part of your home value each year. This deduction is computed first on Form 4562, which transfers to Form 8829 to determine the business-use percentage along with other home office deductions. This deduction is based on your home's fair market value at the time you began taking the deduction, and it is only available to daycare providers who are homeowners. Renters may take a portion of the monthly rent on Form 8829. Other items you'll need to depreciate rather than deducting the costs directly on Schedule C include furniture, computers, software, kitchen appliances and other property with a useful life of more than one year.

Sale of Daycare Home

All taxpayers are allowed to exclude the first $250,000 ($500,000 for some married taxpayers) of gain derived from the sale of your personal residence. Although home-based daycares are not required to use Form 4797 to report a gain on the sale of business property in this case, you will be required to reduce your "gain exclusion" by the amount of depreciation you either took or were entitled to take on the daycare building during the years you were in business. The reduced exclusion amount and the gain will be reported on Schedule D. Even if you opted not to claim depreciation, this applies to you if you were entitled to claim it in any year. For this reason, it is very important that you keep copies of all records and tax returns related to the daycare business until after you sell the home.

References

• IRS Pub 587: Business Use of Your Home
• Form 8829 Instructions