If you run your in-home day care as a sole proprietorship, you report business income and expenses on Schedule C. Many of the deductions -- advertising, employee wages, insurance costs -- are the same as for any business. Other write-offs, such as the business use of your home, are treated differently when day care is involved.
Using Your Home
Normally taking a write-off for the business use of your home requires devoting space exclusively to the business. When you run a day care you can take a deduction even if you use the same area as your living room after hours. You take the business-space deduction only if you're licensed by the state, in the process of applying for a license or exempt from a license. The simplest way to take the deduction is to claim $5 per square foot of day care space, up to 300 square feet.
Calculating actual expenses often yields a bigger deduction than using the $5-per-square-foot method. Divide the number of square feet you use for business by the total square footage in your house. If, say, you use 10 percent, you can take 10 percent of your mortgage interest, property taxes and utility costs as a business deduction. If your day care space isn't exclusively used for business, you have to deduct for the personal-use time. For example, if it's used 30 percent of the time for day care, you get 30 percent of the business-use write-off.
Writing Off Meals
If you feed the kids, you can write off every meal, snack or juice box you provide them. However you can't simply take food out of your kitchen and try to claim a deduction. The IRS says you have to keep records and receipts that distinguish food for your day care kids from the food for you and your family. If you prefer, you can base your deduction on the IRS' standard meal rate for each child. IRS Publication 587 provides the rates.
Normally when you buy equipment for a business, you deduct the cost by depreciating it over several years. If you buy anything you expect to last for more than a year -- toys, chairs, blocks -- you can write off the entire cost in the year you make the purchase, using the Section 179 rule. That saves you a lot of math and allows you to take an immediate deduction. Items that don't last -- art supplies, say -- you write off as supplies.
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