Tax Deductions for Daycare Homes
Daycare homes may serve both young and old populations: working parents needing care for their young children as well as working children needing care for elderly parents unable to remain at home independently. As of the time of publication, government subsidies provide meal assistance through the U.S. Department of Agriculture for more than 3.2 million children and 112,000 adults receiving daycare. Providers may also receive tax advantages for operating a small business from their homes.
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Definitions and Regulations
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To qualify for tax deductions as a family daycare, the Internal Revenue Service (IRS) requires the care to be provided in the home of the provider for a period of less than 24 hours and for non-medical purposes. Providers must comply with any state regulations or licensing requirements, as most states require licensing for the care of more than four children. Family-care providers may be required to pass criminal background checks, enroll in training courses or submit to home inspections.
Income Reporting
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All income received from daycare services is taxable, according to the IRS. A daycare provider may be considered self-employed or may incorporate as a business entity, such as a sole proprietorship or other type of corporation. Self-employed daycare providers must pay self-employment tax on their net income, meaning their income after qualifying expenses are deducted. Income records should be kept accurately, whether in the form of a handwritten record or a computerized spreadsheet, for auditing purposes and to calculate year-end totals.
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Use of Home
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To qualify for a tax deduction, the IRS typically requires businesses operating out of the owner's home to have a dedicated work space separate from the owner's living quarters, also known as "exclusive use." According to IRS Publication 587, a daycare operator who uses space in her home for providing these services may still deduct the associated costs, even if the space is also used for "nonbusiness purposes." A daycare home must be licensed and serve either children or individuals age 65 or older or those who are unable to care for themselves. Calculate the number of hours used for daycare and the percentage of space used in the home for regular daycare operations to determine a percentage to apply to income generated from the business. Deductions may then be made from costs such as rent, utilities or home maintenance costs.
Other Expense Deductions
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The cost of meals provided in a home daycare is a deductible expense, as long as the food is not consumed by the provider's family. While 100 percent of the food costs for clients are deductible, the cost of food provided to any employees is only 50 percent deductible. Standard meal and snack rates may be used, as determined by the IRS, or costs may be tracked individually by the provider. Other possible expenses that may qualify for deductions under IRS rules include equipment, such as computers and cell phones, property depreciation costs, insurance premiums, real estate taxes and casualty losses.
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References
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