When you run an in-home daycare facility, you’re probably going to use the same areas for business and non-business activities. The IRS understands this, so they have special rules for deducting the business use of your home. To get home daycare tax deductions, you’ll need to calculate the percentage of your home used for the business and keep detailed records of related expenses like utilities and supplies.
Can you deduct the business use of your home as a daycare provider?
If you can answer yes to both of the following questions, you meet the IRS requirements to deduct your home daycare. These requirements relate to the home office tax deduction, which is applicable to in-home daycares.
- Do you provide regular daycare for children, people age 65+, or people who are unable to care for themselves due to a mental or physical disability?: As a rule of thumb, “regular use” means you use it for business two or three times a week.
- Have you met your state’s licensing requirement to provide home daycare?: In other words, are you licensed (or exempt), certified, registered, or otherwise approved to provide care in your home?
Note: You can use the space for non-business activities, but a room you use only occasionally for daycare will not qualify for the deduction.
How much is the home office deduction for daycare providers?
You and your family probably live in the same rooms where you provide your daycare services, so the amount you can deduct depends on the amount of time you use those areas for business only.
When you use the standard method, you can deduct the time percent of your direct expenses, and your time-space percent of the indirect expenses.
There is a limit to the amount you can deduct if you use the simplified method. The maximum area you can claim is 300 ft2. So, you can deduct up to $1,500 using the simplified method for calculating the home office deduction. Continue reading for more details on how the simplified method is calculated vs. the standard method.
How to calculate the home office deduction for your in-home daycare
First, you’ll need to decide whether to use the simplified method or the standard method to calculate your deduction. Here’s what you need to know about each one:
The simplified method
Using the simplified method, you will measure your home area used for daycare (in ft2). The IRS will let you deduct up to 300 ft2 at $5 per square foot. With this limitation, the maximum deduction you can claim using the simplified method is $1500.
Example: If the space measures 200 square feet, then the deduction would be $1,000 (200 x $5).
When you use the simplified method, you will deduct this amount instead of calculating the direct and indirect expenses related to your in-home business (things like mortgage interest, repairs, insurance, utilities, etc.).
What is the benefit of using the simplified method? For many taxpayers, the simplified method is a good option because it doesn’t require much record-keeping and makes it easy to calculate the deduction.
The standard method
Using the standard method, you can deduct a portion of the costs related to maintaining your home. To understand how much to write off, you’ll need to figure out the time-space percentage of your home. The time-space percentage depends on:
1. The area of your home used as a daycare and
2. The percentage of time that part of your home is used for daycare.
Note: It’s important to calculate this number correctly to maximize your deduction on your tax return.
What is the benefit of using the standard method? Using the standard method, you may be able to write off more of your total expenses. If you use the simplified method, your deduction is capped at $1,500.
Calculating your time-space percentage for the standard method
Step 1: Add up your direct expenses. These are things you use or pay for because you have a business in your home. For example, this could be new paint or carpet in the daycare space.
Step 2: Add up your indirect expenses. These are things that you pay for that apply to your entire home, like homeowner’s insurance, utilities, major repairs, etc.
Step 3: Multiply your direct expenses by your time percentage. In the example above, this was 33%.
Step 4: Multiply your indirect expenses by your time-space percent. In the example above, this was 22%.
Example: Let’s say you worked from 7 a.m. – 6 p.m., five days a week (Monday – Friday).
11 hours per day x 5 days per week x 52 weeks = 2,860 hours total
There are 8,760 hours in a year. So, to find your time percentage, you’ll divide 2,860 hours/8,760 hours.
2,860 hours/8,760 hours = your time percentage is 33%.
Now, let’s say that you used 2000 of the 3000 square feet in your home regularly for your daycare. 2,000 ft2/3,000 ft2 = your space percentage is 67%.
Finally, you’ll multiply the time percentage and the space percentage to figure out your time-space percentage.
33% x 67% = your time-space percent is 22%
Did you start or stop your daycare business within the year?
There are 8,760 hours in a year. But, since your daycare wasn’t operating all year long, you’ll need to calculate the number of days/hours your home was available as a daycare. This will give you a prorated time-space percentage. Not operating your daycare year-round will impact other deductions as well.
Other deductible home daycare expenses
Home daycare providers can deduct several expenses related to their business operations. Some common deductible expenses include:
- Utilities: Costs for electricity, water, and gas can be partially deducted based on the percentage of the home used for daycare.
- Repairs and maintenance: Expenses for maintenance or repairs in the parts of the home used for daycare can be deducted.
- Supplies and equipment: Items such as toys, furniture, educational materials, and safety equipment used for the daycare can be claimed.
- Food expenses: If providing meals and snacks, the cost of food can be partially deducted.
Daycare providers can claim these deductions by reporting them on their tax returns, typically using Schedule C. The deductions can often be claimed in full or partially, similar to the home office deduction, depending on how much of the expense relates to daycare activities versus personal use.
TaxSlayer makes it easy to claim this deduction and does the calculations for you. Create a free accountand start filing with TaxSlayer Self-Employed!
