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Home Daycare Tax Tips

Providing home daycare for family, friends and neighbors can be a great source of extra income for a stay at home parent!

Like any business, you’ll need to keep track of your income and expenses and pay tax on your income.

Home Daycare Tax Tips

However, did you know that home daycare providers can take advantage of some special rules for deducting business use-of-home costs and meal and food costs?

This article is a quick tax overview for home daycare providers!

Babysitting and Home Daycare Income is Taxable!

A common mistake when people watch kids part time (especially family, friends or other relatives) is thinking that the income they make, even if small, isn’t taxable and doesn’t need to be reported.

This is wrong, and could end up causing you income and self-employment tax issues down the road!

Typical Tax Status

Most home daycare providers operate as sole proprietors.

This means that you will report your home daycare income and expenses on Form 1040 Schedule C and your net income is subject to income and self-employment tax (currently an additional 13.3% but could rise to 15.3% in 2013).

Deductions for Using Your Home

Unlike the home office deduction, if you use your home for providing daycare on a regular basis, you are allowed to deduct the business expenses for that part of your home even though you also may also use that space for non-business purposes!

Business Use Percentage

To figure out the business use percentage of your home, you’ll need to calculate:

  • Area Percentage: The total square footage used for daycare on a regular basis
  • Time Percentage: The hours of business use (for example, if you watched kids 12 hours a day, 5 days a week, for 50 weeks in 2012 that would be 3,000 divided by 8,784 which is the total hours in the year (24 hours times 366 days in 2012) , for a total of 34.15%)

The square footage used could include any rooms in your home, like bedrooms, the living room, the kitchen, the basement, the laundry room, and/or the garage.  Areas that you only use occasionally for business (such as a bedroom you only sometimes use for naps but that is normally “off limits”) are not deductible.

The good news is that you don’t have to keep records showing the specific hours each area was used for business!

You can deduct the business portion of all your home expenses, such as:

  • Homeowner’s insurance
  • Repairs and maintenance
  • Utilities
  • Property taxes
  • Mortgage interest
  • Satellite television, etc.

Your home telephone line, even if required by law, is not deductible unless you substantiate the business purpose of each call.

Direct expenses can be deducted 100% against your business income.

For indirect expenses (those that benefit both the business and personal parts of your home), you’ll multiply the expense by both the area and time percentages.

Depreciating Your Home

You are also allowed to claim depreciation on the business portion of your home.  You will need to know how much you paid for your house, or its fair market value on the date you started using it for your daycare business.

Be aware that if you sell your home you may be required to recapture that depreciation, and you may owe tax on that recapture.  However, the benefits of the depreciation usually always outweigh any tax effects on sale.

Food Costs

Meals and snacks can often be the biggest expense for a home daycare provider!

For these, you have two options:

  1. You can deduct 100% of the actual cost of food consumed by the daycare recipients (so you’ll need to keep receipts and only deduct the food that the kids actually eat versus what you and your kids eat)
  2. You can use an optional “standard” meal and snack rate method ($1.24 for breakfast, $2.32 for lunch, $2.32 for dinner and $0.69 for snacks in 2012)

Other Deductible Expenses

There are other common deductible expenses that you may incur in your daycare business, such as:

Business start-up costs

These are expenses you paid before opening your doors for business.

Examples might include:

  • Advertising
  • Inspection fees
  • Supplies
  • Professional fees.

Car and Truck Expenses

These could relate to you taking the children to and from school, the park, etc.

You can claim actual expenses or the standard mileage deduction (55.5 cents for 2012), but you’ll need to keep receipts and/or a mileage log depending on which method you choose.

If your trip is primarily personal in nature, you cannot deduct expenses or mileage for that portion of the trip, even if you conduct some business while there.  For example, if you took kids to school, then went to meet a friend for lunch, then back home, you could only deduct mileage to the school and back.  The personal portion of the trip is not deductible.

Depreciation on Equipment

You can claim depreciation on assets that you use in your daycare business, even if you already owned them before starting your business!

These can include:

  • Computers and office equipment
  • Furniture, appliances and playground equipment
  • DVD and Blu-Ray players
  • Televisions
  • Musical instruments

If you want to claim depreciation on things that you already owned, you’ll need to know the date you started using them in your business and their fair market value on that date.

Commonly Audited Issues

The IRS tells its examiners to look at the following issues when they audit people with home daycare businesses.

You definitely want to avoid making these mistakes!

  • Not reporting cash income on your tax return (yes, they can get your bank statements!)
  • Over-stating your expenses (especially those paid in cash)
  • Keeping poor records (for example, who you watched, what time the kids arrived and left, what meals the kids ate, etc.)
  • Including food that you and/or your kids ate in your deductible food expenses
  • Claiming unusually large home expenses
  • Claiming business use of home expenses that are not related to your daycare business
  • Trying to write off supplies and miscellaneous expenses for things you used personally

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