How to Prepare for Tax Time with Your Home Daycare

You can use your home daycare to offset the tax debt created by your income, or even the income of your spouse.

Difficulty:

Moderate

Instructions

Things You'll Need

• Loose Leaf Notebook
• Three Hole Punch
• Envelopes
• Pen
• Record Keeping System or Software

1. 

   Set up your loose leaf notebook with month tabs. Save your utility bills; electric, phone, water/sewer, cable, fuel, etc. Put each one in the tabbed section for the month that you received/paid it.
   You can deduct business expenses, according to the IRS, if parts of your home are used on a consistent basis.

2. 

   Set up envelopes with months written on them. Have one set marked HOME and one set marked DAYCARE. Keep this month's envelopes in your glove box, purse, wherever they are handy and you are most likely to use them. As you make purchases, ring out home supplies separately from daycare supplies. Write one the back of each receipt, and put it in the appropriate envelope.
   At tax time, this proves to your accountant and the IRS that you are not trying to sneak your home purchases in as part of your business expense.
   **Note** This is really important, because your daycare expenses usually will by FAR bypass your home expenses, and you don't want your accountant or the IRS to discount 50% of your daycare expenses because you can't prove your home expenses.
   ***Note***Especially note large purchase of items that are used solely for the business, or partially for the business, as these are important assets that you will claim at tax time.

3. 

   At the end of the month, put your receipt envelopes into the box marked "receipts". Since you've already made some kind of notation on the back of the receipts to remind you what it was for "art supplies for t-shirt project" or "groceries for daycare", you won't need to do anything more with them until tax time.

4. Deductions

   Keep every gas receipt, car repair bill, even toll receipts for daycare trips, or daycare-related trips (to grocery store, training classes, etc). Keep meal receipts when you take the kids out to eat, or for anything that you pay for on daycare trips, including Christmas gifts, birthday gifts, etc. Remember to write on the back of each receipt.

5. 

   Keep a mileage book in your van, noting distances to places that you go for the daycare, like the school, the playground, etc.
   You can track by odometer readings, but you can also keep track of actual miles. This is a lot easier if you track your mileage on your daycare software.

6. 

   Measure every room that you use for your daycare. Keep note of any rooms that you use exclusively for the daycare, which rooms you use for both family and daycare, and which rooms are just for family. You need to write down the square footage for all of the above, as it will be used to compute your time/space formula.

7. 

   Keep track of how many hours you were open for business, and how many hours you were AVAILABLE to be open for business. For example, your hours of operation might be 6am to 6pm, but your first child doesn't get dropped off until 7:30. You were still available during the other hour and a half, and can get some credit for that on your taxes.
   This also is used for your time/space formula.

Tips & Warnings

• Being organized pays off.

• If you pay an accountant to do your taxes, and bring all of the above, categorized and notated, your accountant will love you! If you do your own taxes, you just made your job a whole lot easier.

• According to the IRS, you can only claim business expenses for your daycare if you provide licensed daycare, or legally exempt daycare.

• You have to use rooms that you claim for business regularly in your daycare, you cannot count a room used occasionally towards your deductions.

Resources

• Darling Daycare