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.
Can you deduct the home office/business use of your home?
If you can answer yes to both of the following questions, you meet the IRS requirements.
- 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?
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.
How does the home office deduction work?
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 a set amount per square foot. In 2020, you can write-off $5 per square foot.
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 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. It’s crucial that you calculate this number and enter it correctly for your taxes.
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 maximum.
Calculating your time-space percentage for the standard method
Step 1: Calculate your time percent. Divide the number of hours you spend working by the total number of hours in the year. You should include the time spent working on records, cleaning, invoicing, preparing meals, setting up for the next day, etc. – even after the children have gone home.
Step 2: Calculate your space percent. Divide the area you use for daycare (length x width in square feet) by your home’s total square footage.
Step 3: Calculate your time-space percent. Multiply your time percent by your space percent.
Let’s say you worked from 7 am – 6 pm, 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 percent, you’ll divide 2,860 hours/8,760 hours.
2,860 hours/8,760 hours = your time percent 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 percent is 67%.
Finally, you’ll multiply time percent and space percent to figure out your time-space percent.
33% x 67% = your time-space percent is 22%
Did you start or stop your daycare business in 2020?
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.
Calculating your home office deduction using 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. Examples could be new paint in the daycare space or new 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, this was 33%.
Step 4: Multiply your indirect expenses by your time-space percent. In the example, this was 22%.