Your Home Daycare Tax Deductions Checklist

Operating a home daycare opens up specific tax advantages. The Internal Revenue Service (IRS) allows family child care providers to deduct a portion of their home expenses and other business-related costs. Understanding these deductions requires careful record-keeping and a clear understanding of which expenses qualify.

Determining Business Use of Your Home

To deduct a portion of your home’s costs, you must determine the percentage of your home used for business. You must use the area for your daycare on a regular basis and meet your state’s licensing or registration requirements, or be exempt from them.

The calculation for your deduction is the Time-Space Percentage, which determines the business portion of shared home expenses. First, calculate your Space Percentage by dividing the square footage used for your business by your home’s total square footage. For instance, if you use 1,000 square feet for your daycare in a 2,500-square-foot house, your Space Percentage is 40%.

Second, calculate the Time Percentage. Track all hours your business operates annually, including time spent on preparation and cleaning, not just when children are present. Divide your total annual business hours by the total hours in a year (8,760, or 8,784 in a leap year). For example, 2,750 annual business hours would result in a Time Percentage of approximately 31.3% for a leap year.

Finally, multiply the Space Percentage by the Time Percentage to find your Time-Space Percentage. Using the examples above, you would multiply 40% by 31.3% to get a Time-Space Percentage of 12.52%. This is the percentage you will apply to your shared home expenses.

Identifying Deductible Expenses

Once you have your business-use percentages, you can categorize your expenses. It is important to distinguish between general business costs and costs related to the home itself.

Business Operating Expenses

Expenses unrelated to your home are 100% deductible without applying the Time-Space Percentage. These include:

• Food, toys, books, and art supplies
• Educational materials
• Business liability insurance
• Advertising for your daycare
• Business licenses or fees

Home-Related Expenses

For costs related to the business use of your home, the IRS offers two methods for calculating your deduction: the Simplified Method and the Actual Expense Method.

The Simplified Method allows you to claim a standard rate of $5 per square foot of business area, up to 300 square feet. For daycare providers, this rate must be multiplied by your Time Percentage. The maximum deduction under this method is $1,500. If you choose this option, you cannot deduct any actual home expenses like mortgage interest or utilities for that year.

The Actual Expense Method requires more detailed record-keeping. Under this method, home expenses fall into two categories.

Indirect Home Expenses

These are costs for maintaining your entire home, such as mortgage interest, property taxes, and utilities. You apply your Time-Space Percentage to these costs to find the deductible amount.

Direct Home Expenses

These are costs that apply only to the daycare area, like painting the playroom. For these expenses, you apply only the Time Percentage.

Food Program Expenses

The cost of meals and snacks is a deductible expense. The IRS offers a simplified method using Standard Meal and Snack Rates, allowing you to deduct a set amount per child per meal instead of tracking actual food costs. For the 2024 tax year, Tier 1 rates are $1.65 for breakfast, $3.12 for lunch or supper, and $0.93 for a snack. You must keep daily records of which children were served which meals to use this method. This approach is often more advantageous and less burdensome than saving every grocery receipt.

Required Tax Forms and Recordkeeping

Proper documentation is the foundation for filing your taxes. For home daycare providers, contemporaneous records are a requirement for substantiating deductions in an IRS inquiry. This means keeping organized files of all receipts, attendance logs, and calculations throughout the year, not just at tax time.

Your records must include a detailed log of all hours worked, which is necessary for calculating your Time Percentage. This log should capture hours children are in your care and time spent on business activities like meal preparation, cleaning the daycare space, and planning activities. You also need to maintain daily attendance records for each child and a count of the meals and snacks served to each one.

You will report your daycare’s finances on two primary tax forms. If you use the Actual Expense Method for your home deduction, you must file Form 8829, Expenses for Business Use of Your Home. On this form, you will use your Time and Time-Space percentages to calculate the deductible portion of your home expenses.

All business income and expenses are reported on Schedule C, Profit or Loss from Business, to determine your net profit or loss. Business operating expenses and your food deduction are reported directly on this form. If you use the Actual Expense Method, the total from Form 8829 is carried over to Schedule C. Providers using the Simplified Method report their home deduction directly on Schedule C and do not file Form 8829.

Claiming the Deductions on Your Tax Return

The net profit or loss calculated on your Schedule C is reported on your personal Form 1040 as part of your total income. The completed Schedule C, and Form 8829 if applicable, must be submitted with your overall tax return. Tax preparation software will automatically integrate these forms with your Form 1040 during electronic filing.

If filing a paper return, you must attach physical copies of these forms to your Form 1040. It is important to keep copies of all submitted forms and supporting documentation for at least three years.