Now that tax time is past you can start to focus on preparing for the next one. Isn’t that a cheery thought? Maybe not, but it is a necessary one if you want to maximize your tax deductions and make the next tax season a little less stressful.
Let’s take a look at how the IRS defines different types of daycares and ten potential deductions you might take advantage of the next time around and run the best daycare service possible.
Defining a Daycare
The IRS recognizes that childcare centers and daycares come in all shapes and sizes. It provides some guidance to help you determine how to structure your childcare business and when certain regulations tend to apply.
The important thing to remember is this: all income is taxable, regardless of amount or how it is earned.
- Kith and Kin daycare is childcare provided by relatives, friends, and neighbors. It may or may not be paid, but if it is paid, the income is taxable. The taxpayer may also need to file as self-employed. Check with a reputable tax or employment professional to help you determine when and if self-employment filing is a consideration.
- Family Daycare is typically in the home of the provider, is non-medical in nature, and less than 24 hours a day. Most states regulate daycares with more than four attendees. Family daycares may require some form of approval, certification, registration, or license under applicable local or state law. Compliance with the regulations may impact deductions for business use of the home.
- Childcare Centers are provided in a separate facility from the owner’s residence. Often larger facilities than family daycares, childcare centers are often organized as corporations, S-corporations, or partnerships. A corporation may operate more than one facility.
While all states require these types of businesses to be licensed, the details of licensing differ from state to state. Regulations may require reporting attendance records or other information. The facility may have a commercial kitchen, playground equipment, swimming pools, and a large quantity of toys.
Deductions are allowed based on the number of qualified business miles driven. Mileage can include trips to and from classes taken to improve daycare skills, field trips with attendees, and errands related to the daycare business such as trips to the bank.
Mileage to and from the store for daycare supplies and chauffeuring attendees to other places is also allowable.
Capital purchases, also known as capital items or capital expenditures, are durable items expected to last longer than a year and cost more than $200.00. Some examples are cribs, high chairs, riding equipment, and playground equipment.
Keep the receipts for capital purchases separate from the receipts for general supplies because the deduction is handled differently.
Supplies and expenses that fall outside of capital purchases must be “ordinary and necessary” to the operation of the daycare to be deductible. If you purchase business supplies and personal items in the same trip, try to get a separate receipt for the business expenses.
Office supplies include postage, paper, ink, toner, pencils, ledgers, and other items used in an office setting. It does not include supplies used as part of daycare activities.
Depending on the age of the attendees, you will probably buy a large number of:
- Diapers and diaper supplies
- Cleaning and laundry supplies
- Child-proofing devices
Toys, arts and crafts supplies, and children’s books also count toward your business deductions. Again, save all your receipts and put them in a single place so you can find them at tax time.
Memberships, dues, and professional fees
Do you belong to a professional association or organization? If so, your paid membership and any dues are deductible as are professional fees you may pay for certification and other activities.
If your state requires your daycare to be licensed or you maintain other professional licenses related to your daycare business, the fees for the licensing are deductible. Keep your receipts and copies of the licenses available.
If you pay for any form of advertising from online ads to direct mail, you can get a deduction for some or all advertising expenses. Knowing that it is deductible may help convince you to budget for more advertising so you can grow your business further.
Business use of home
You can deduct a certain portion of your mortgage or rent, insurance, and utilities when your business is based in your home. Your home must be used as a licensed daycare to become qualified as a deduction.
We talk a little more about deducting the business use of the home below, under Substantiation.
Food and snacks
If you are responsible for providing meals or snacks to your attendees, you can deduct the cost of these as you would other daycare supplies.
Along with memberships and professional licenses, you may avail yourself of various continuing education opportunities in the daycare industry. It’s also possible your state requires a certain number of continuing education hours to maintain a license.
The costs of the continuing education classes and credits are tax deductible as well.
No matter what you deduct, you must be able to substantiate or prove, that you are eligible for that deduction. Providing receipts and records for income and expenses generally, satisfies this requirement. Some deductions may also require a record of why the money was spent.
Where other home-based businesses can deduct a home office, the rules differ for childcare providers. Where a home office may only be deducted if it is used exclusively for the business, a daycare must show regular use to qualify for expenses tied to the business use of the home.
Regular use is met when you can establish that the business use of an area is continuous, ongoing, or recurring. For example, if you have a bedroom that is used every day for naps, it can be considered regular-basis for tax purposes, and you can apply for a deduction. However, if that bedroom is used only occasionally for naps, you are not eligible for a deduction.
Other areas that can qualify for regular basis use are the bathroom and eating areas. The total square footage in regular use as part of the daycare can be used to calculate the allowable deduction. The amount of time these areas are in use for daycare is also taken into account.
Do you feel like you just found a gold mine? It may not be as substantial as that but being eligible for more tax deductions is never a bad thing. Take care to save receipts and be prepared to provide proof that the expense was related to your daycare business.
Many daycare management software solutions include accounting modules that can store records and keep you organized. There is a little work involved in maintaining the proper records, but it will be worth it when tax time rolls around again next year.