As a self-employed home daycare provider, it's important to know how to maximize your tax deductions in order to offset your income and lower your taxes. With the tax deadline fast approaching, it's time to start thinking about what expenses you can claim as legitimate business expenses. In this article, we will go over various tax deductions that you can claim on your tax return.
If expenses are used only for your daycare, you can take a full deduction!
- Advertising: If you paid to run an advertisement for your daycare business, you can deduct that expense.
- Bank fees: If you borrowed money for a specific daycare-related purchase, such as a transport van or playground equipment, and paid interest on it, you could deduct the interest you paid. Monthly bank fees are also deductible.
- Cleaning expenses: If you hire a helper to clean the daycare or purchase cleaning supplies, you can deduct those expenses.
- Wages: If you pay an employee or contract labor, you can deduct those expenses. Wages mean you withhold taxes, while contract labor means no taxes are taken out.
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Food: You can deduct food expenses, but it's important to keep accurate records of what you purchase and how much of it is used for daycare versus personal use. You can either use the actual expense method or the standard meal allowance method. You can also deduct the cost of meal planning services like The Kid Menus!
- The first method available for claiming food cost deductions is to claim actual costs. This method involves keeping every receipt for groceries and adding them all up at the end of the year. While this method may be accurate, it can be time-consuming and challenging to keep track of every receipt. Only choose this method if your reimbursement is significantly less than your actual expenses.
- The second method available is the IRS Standard Meal Allowance, which allows up to one breakfast, one lunch, one supper, and three snacks per day per child based on tier-one rates. This method is much simpler than claiming actual costs and allows you to deduct a set amount for each meal and snack served. It's essential to note that while you can only be reimbursed for up to three meals a day from the CACFP, you can be reimbursed for more than that using the standard meal allowance (of course, the child must be present and have eaten those meals.) You can also use this deduction for children present who cannot be claimed in the CACFP. If you mark those with a "P" for “present” regularly on your attendance rosters, just can count up the number of "P's" for breakfast, lunch, and PM snack, and deduct the extra meals served that were not reimbursed by your food program - without having to keep receipts!
- It's important to note that if you use the standard meal and snack rates, you must maintain records to prove how you computed the total amount deducted for the cost of the food provided to eligible children. If you receive a year-end summary from your sponsor that tells you everything you were reimbursed for and documents all the meals that were served, it can simplify this process significantly.
- Gifts for daycare kids: You can deduct up to $25 per kid per year for gifts for the daycare kids.
- Insurance: If you have liability insurance for your daycare, you can deduct the full cost. Homeowner's insurance, on the other hand, needs to be prorated.
- Interest on credit cards: If you have a credit card that is exclusively used for daycare purchases and you carry a balance and get charged interest, you can deduct that interest.
- Laundry: If you pay someone to help with laundry or purchase laundry supplies, those expenses are deductible.
- Legal and professional expenses: Fees for attorney services, tax return preparation, and other professional services are deductible.
- Postage: You can deduct postage expenses for mailing items related to your daycare business.
- Phone: If you have a phone line that is exclusively used for daycare, you can deduct the full cost. It has to be completely exclusive for daycare use to count.
- Repairs and maintenance: If you have repairs and maintenance that are specific to your daycare business, such as repairing a hole in a wall in a room that is regularly used for daycare, those expenses are fully deductible.
- Household supplies: This includes paper goods, detergents, Ziploc bags, trash bags, light bulbs, air fresheners, welcome mats, snow shovels, and clocks. These items can be tax-deductible if they are used in the daycare space. However, if they are in the home space and are sometimes used for daycare, then they could fall into the time-space percentage we'll talk about later.
- Office supplies: Such as printers, paper, envelopes, file folders, receipt books, and computer software. If they are fully for daycare use, you get to deduct them 100%. But if they are shared with the home office, then you have to use your time-space percentage (again, we’ll cover this later in this article).
- Program supplies are also deductible, such as arts and crafts supplies, diapers, wipes, sheets, blankets, and seasonal decor if displayed in the daycare area. Toys and equipment, like books, games, cribs, bouncers, pack ‘n plays, and changing tables, can also be tax-deductible.
- Training and professional dues: continuing education and expenses incurred while traveling for daycare-related activities, including meals and entertainment. Mileage to these events is also deductible, but if it’s claimed under the travel, meals, and entertainment line, you’re only able to take a partial percentage.
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Vehicle expenses, such as gas and maintenance, are also deductible. If you have a vehicle totally dedicated to daycare, you could deduct the whole vehicle and depreciate it over several years (more on this below). But if it’s a vehicle used for personal use and daycare use, the best option is to keep a mileage log.
- Mileage log – use to keep track of qualified business miles driven, like trips to and from classes taken to improve your daycare skills, field trips, errands related to the daycare business, and chauffeuring your daycare kids to other places. If you routinely run the same errands, you can create an Excel spreadsheet by tracking the number of miles from point A to point B once, then adding in the date for one trip per week to the Excel sheet with the current mileage rate each time.
If the expense is a large purchase, you can take a recurring deduction!
If you buy large items, you can choose to depreciate large assets (that just means you get to take a portion of that expense each year for the life of the item). Your accountant will help you with this, so it's not something you have to completely understand.
If the expense is used for your daycare and home, you can take a partial deduction!
Next, let's talk about the use of your home as a daycare. There are lots of expenses you can take related to your home since that’s technically your place of business as well (this is officially known as a tax form titled Form 8829).
These expenses are things like utilities, electricity, internet, natural gas, TV, water, and trash, as well as home appliances, improvements, repairs, insurance, taxes, and mortgage payments are all deductible expenses for daycare providers.
Since these things are both for your home and business benefit, you’ll calculate exactly how much is attributed to your daycare business by using a calculation called the space/time percentage.
Space/Time Percentage Calculation
This percentage is calculated by dividing the number of square feet used for business by the total square feet in the house and multiplying it by the number of hours of operation in a year divided by 8760 (the total number of hours in a year).
Square feet of your home that are “regularly used” for business / total square feet of your home = %
“Hours of operation” per year / total number of hours in a year (8760) = %
Multiply one time the other to get the combined percentage.
“Regular Use”
“Regular use” mentioned in the calculation above is when you can establish that the business use of an area is continuous, ongoing, or recurring.
For example:
- A bedroom that's used every day for naps = regular use
- A deck the kids play on every day = regular use
- A bedroom used every once in a while = not regular use
“Hours of Operation”
Hours of operation mentioned in the calculation above aren’t just the hours you have kids! It includes all the things you do to run your business outside of designated business hours like shopping for meals, preparing activities, shopping for supplies for activities, unloading groceries, loading and unloading the dishwasher, doing laundry, cleaning toys and carpets, and advertising, among many others. Again, keeping a simple time log for one-off or recurring tasks will make this easy!
Note: only daycare-related tasks that create additional work can be claimed, not your family grocery shopping, general house cleaning or yard work.
All in all, there are lots of legitimate ways to pay less this year for all the hard work you do running your home daycare. Don't hesitate to reach out to a tax professional if you have any questions or concerns. Happy tax season!