A taxpayer who is in the business of providing family day care in their home may deduct the ordinary and necessary expenses of their business. The two primary deductions include the business use of their home and the cost of providing meals and snacks to children in their care. The following is a rundown on deductible business expenses for home day care providers.
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Business Use of Home
Generally, to be able to take a deduction for business use of the home, the tax law requires the business portion to be used exclusively for business. However, a special allowance is carved out for day care facilities, allowing prorated use even though the business is operated in parts of the home also used personally by the care provider and his or her family. But that exception to the exclusive use requirement applies only if the owner or the operator of the day care facility:
(1) Has applied for (and the application has not been rejected) a license, certification, registration or approval as a day care center or a family or group care home under the provisions of any applicable state law;
(2) Has been granted (and the grant has not been revoked) a license, certification, registration or approval as a day care center or a family or group day care home under the provisions of any applicable state law; or
(3) Is exempt from having a license, certification, registration or approval as a day care center or a family or group day care home under the provisions of any applicable state law.
The day care facility exception does not apply if the services performed are primarily educational or instructional in nature (e.g., musical instruction). However, the exception does apply if the services are primarily custodial and if the educational, development or enrichment activities are only incidental to the custodial services. The determination depends generally on the facts and circumstances of each particular case.
When calculating the percentage of business use of the home, both the space used to operate the day care business and the amount of time that the space is used to provide day care – including preparation and cleaning time – are factors.
Example – Edna uses her living room, kitchen and bathroom ten hours a day, five days a week, to provide licensed day care services. The home is 2,400 square feet, and the living room, kitchen and bathroom are a combined 1,400 square feet. Edna’s percentage use of her home for business is determined as follows:
Although the business use of the home deduction cannot exceed the gross income of the business, and there is an order in which the deductions are allowed while applying the gross income limitation, the deduction is generally made up of the following prorated expenses:
- For an Owned Home:
- Mortgage interest
- Home taxes
- Homeowner’s insurance
- For a Rented Home:
- Renter’s insurance
Example: Edna, in our prior example, provides family day care services out of her rented home, for which she pays $2,200 a month in rent and $3,100 for utilities for the year. Her business use of the home deduction is determined as follows:
When an individual sells property, any gain from the sale of the property is taxable. The tax term “basis” is the value from which any taxable gain is measured. For personal use property or investment property the basis is generally the cost of the property. For business property the term basis is replaced with adjusted basis, which generally means the cost of the property reduced by business deductions, such as depreciation, attributable to the property.
Some providers have rooms such as play rooms or sleeping rooms set aside that are used exclusively for their business. In these cases, a separate calculation for the exclusive-use space should be made using 100% use, and then that amount should be added to the deduction for the prorated portion of the home.
Deducting Meals For Business
Family day care providers are allowed to deduct the cost of meals provided to the children in their care. However, separating the cost of food between that used for day care versus for personal use can be a record-keeping nightmare.
To minimize disputes with family care providers about the amount of their meal deduction and the quality of their substantiation, IRS will allow them to use standard meal and snack rates to compute the deductible cost of food instead of deducting actual costs. Recordkeeping is also simplified if standard rates are used. The simplified deduction for each meal and snack bought and served to an eligible child during day care is equal to the US Department of Agriculture's Tier I Child and Adult Food Care Program’s (CAFCP’s) reimbursement rates for meals and snacks served in day care homes. The rates are adjusted annually:
Simplified Meal Deduction – Family Care Providers
The rates do not include the cost of nonfood supplies (e.g., utensils, paper napkins and paper towels), which may be deducted separately. The number of meals per day per child is limited to a maximum of one breakfast, one lunch, one dinner and three snacks. The following is an example of the daily maximum allowance in the contiguous states (the maximum for Alaska and Hawaii will be higher).
|Meal||Number Allowed||2021 Rate||2021 Max|
|2021 Daily Max per Qualified Child||$8.95|
If the provider receives some form of reimbursement or subsidy, they can deduct only the part of the simplified rate that exceeds the reimbursed amount.
The rates may be used only by taxpayers (whether or not they are licensed, registered or otherwise regulated) providing care in their homes to unemancipated children, and only with respect to children for whom they are paid to care and who don't reside in the home.
Family day care providers who use the simplified rates must use them to deduct meals and snacks for the entire tax year, but the providers can switch to deducting actual substantiated amounts in another tax year.
Family day care providers using the standard rates must keep records substantiating their computation of the total deductible amount. The records should include the name of each eligible child, the dates and hours of their attendance in the family day care and the type and quantity of meals and snacks served. A number of commercially available software programs can maintain the required records.
See this related post from Dennis Harabin: Child Daycare Providers and Users Receives Special Tax Benefits
Special tax benefits are available for those providing daycare services for children and the parents who pay for those services. This article looks at the various tax deductions daycare providers may use and the childcare tax credit that the parents may claim.
Other deductions, if adequately substantiated, can include:
- Toys and games
- Computer and software
- Toilet supplies and diapers
- Auto expenses for travel for field trips and business
- Licenses and permits
- Recordkeeping supplies
- Wages paid to helpers
- Personal protective equipment related to COVID-19
- Cleaning supplies
- Other related expenses
As you can see, the record-keeping and tax side of providing family day care can be daunting. If you have questions related to recordkeeping and tax-filing issues, please call us at 551-249-1040.
Do you need more information? You can reach out to Dennis Harabin at Relax Tax today!
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