Top Tax Write Offs for Daycare Providers

Operating a daycare business allows you to reduce your taxable income through specific deductions. These tax provisions help providers account for business expenditures and can lead to significant savings. The rules for daycare deductions differ from other home-based businesses, so it is important to understand the specific calculations and recordkeeping involved.

The Home Use Deduction for Daycares

Home-based daycare providers can claim a deduction for the business use of their home. Unlike the standard home office deduction requiring “exclusive” use, the IRS has a special rule for daycares allowing deductions for areas with “regular use.” This acknowledges that spaces like a living room or kitchen are used for both personal and business activities.

This deduction is based on the “Time-Space Percentage,” which determines the portion of home expenses attributable to your business. To calculate this, you first find the Space Percentage by dividing the square footage regularly used for daycare by your home’s total square footage. For example, using 1,500 square feet of a 2,000-square-foot home results in a Space Percentage of 75%.

Next, calculate the Time Percentage by dividing your total annual business hours by the 8,760 hours in a year. You must include all time spent on business activities, including preparation, cleaning, and parent meetings, not just when children are present. For instance, if your business operates for 3,250 hours a year, your Time Percentage would be 37.1% (3,250 / 8,760).

Your final business use percentage is the Space Percentage multiplied by the Time Percentage. Using the previous examples, this would be 75% multiplied by 37.1%, for a Time-Space Percentage of 27.8%. This final percentage is applied to indirect home expenses like mortgage interest, property taxes, and utilities. Direct expenses that only benefit the daycare area, such as painting a playroom, can be deducted in full.

Common Deductible Business Expenses

Daycare providers can deduct many operating expenses beyond home-related costs. For food and meals, you can either deduct the actual cost of food purchased for the business or use a standard meal and snack rate. The IRS permits using the rates from the U.S. Department of Agriculture’s (USDA) Child and Adult Care Food Program (CACFP). Using the standard rate simplifies recordkeeping, as you only need to track the number of meals and snacks served.

Supplies consumed in the course of business are also deductible. This includes items like art supplies, books, games, educational toys, and cleaning products. If you provide them as part of your service, disposable diapers and wipes are also covered. These items are 100% deductible.

For larger purchases expected to last more than one year, such as playground equipment, computers, or furniture, the cost is recovered through depreciation. Instead of deducting the full price at once, you deduct a portion of the cost over several years. This reflects the asset’s useful life.

Other deductible operational costs include:

• Premiums for liability insurance
• State or local licensing fees
• Wages for assistants or other staff
• Advertising to attract new families
• Bank fees for a dedicated business account
• Fees for legal or accounting services

Calculating and Deducting Vehicle Expenses

You can deduct costs associated with using your personal vehicle for business activities. For a daycare provider, this includes trips to the grocery store for supplies, transporting children, or driving to workshops. The IRS offers two calculation methods: the standard mileage rate and the actual expense method.

The standard mileage rate is the simpler option. For 2025, the IRS rate is 70 cents per mile, which covers gas, oil, and general maintenance. To use this method, you multiply your total business miles for the year by the standard rate. You can also separately deduct business-related parking fees and tolls.

The actual expense method may yield a larger deduction but requires tracking all vehicle-related costs, including gas, repairs, insurance, and depreciation. To calculate your deduction, you first determine your business use percentage by dividing business miles by total miles driven. You then apply this percentage to your total vehicle expenses.

If you choose the actual expense method in the first year you use a car for business, you must continue to use that method for that vehicle in subsequent years. Regardless of the method chosen, you must maintain detailed records to support your claim.

Recordkeeping and Documentation Requirements

The IRS requires adequate records to prove your expenses in the event of an audit. Organized recordkeeping throughout the year is necessary to substantiate your deductions. Without proper proof, legitimate deductions may be disallowed.

For all business purchases, keep detailed receipts, invoices, and bank or credit card statements. If you deduct the actual cost of food, save every grocery receipt. If you use the standard meal rate, you must maintain daily records of which children were served which meals and snacks.

To support the business use of your home deduction, you need documentation of your home’s total square footage and the area used for your daycare. You must also keep a daily log of all business hours, including time spent on cleaning and meal preparation, to justify your Time Percentage.

For vehicle expenses, maintain a detailed mileage log documenting the date, purpose, and total miles for every business trip. If you have employees, you must keep payroll records, such as canceled checks or service reports. Organizing these records will make tax preparation smoother.

Reporting Deductions on Your Tax Return

After calculating your deductions, you must report them correctly on your tax return. Most daycare providers operating as sole proprietors report business income and expenses on IRS Form 1040, Schedule C, “Profit or Loss from Business.” This form details your business’s financial activity.

Schedule C has specific lines for expense categories like supplies, wages, and utilities. You will enter your calculated totals for items like food, supplies, and advertising on the appropriate lines. Vehicle expenses, regardless of the calculation method used, are also reported on Schedule C.

The deduction for the business use of your home is calculated on Form 8829, “Expenses for Business Use of Your Home.” This form uses your Time-Space Percentage to determine the deductible portion of your indirect and direct home expenses. These costs include mortgage interest, insurance, repairs, and utilities.

After completing Form 8829, the final deduction amount is transferred to a specific line on your Schedule C. This integrates your home-related business expenses with your other operational costs to determine your net profit or loss. Form 8829 is for the calculation, while the final deduction is taken on Schedule C.