Operating home-based daycares offers an opportunity for tax reductions and exemptions, according to the US IRS and Canada Revenue Agency (CRA). For instance, in both countries, Family Day Care (FDC) is a recognized child care program provided in the homes of the providers and is usually non-medical for less than 24 hours. A big difference comes in with the regulations from one state to the other. Most of them regulate daycares with more than four kids, among other regulatory checks. Further, the FDCs must be licensed and registered to be able to file claims regarding tax deductions based on their incomes. In the US, the tax deductions are controlled by the Internal Revenue Code (IRC), provided under Section 280A(c) (4). In Canada, FDCs are regulated by the Child Care Regulations under the Child Care Act.
Tax deductions for FDCs (Family Day Care) in the USA
Home office/ business space deduction
In the US, owning family daycares provides owners with a tax shelter. On top of deducting property taxes, points, and mortgage interests, FDC owners can claim a home office deduction. According to the IRS, the FDCs have a tax leeway to capitalize on expenses and costs related to their business. It allows these daycares to deduct both direct and indirect expenses on their fed tax returns. They can deduct part or portions of their home spaces used for the business if their main occupation is child care services.
To calculate the amount to be deducted, the owners of these FDCs need to determine the quantity of time spent on their homes (or rooms) in the provision of the childcare services. Taxpayers need to deduct the rooms that are regularly used for daycare services, but not rooms used for other businesses. If the home is not exclusively used for daycare, owners should reduce the deduction automatically by $5/sq. ft. before any tax deduction. Otherwise, to determine the percentage of home subjective to deduction, divide sq. ft. of the rooms used for daycare by the total home sq. ft. The percentage home used for daycare is multiplied by the percentage time used for daycare against the total time (hours) in a year.
Percentage of a home used for daycare = sq. ft. of daycare rooms / total home sq. ft.
Percentage time = total hours used for daycare/total hours in a year
Net deductible value = Percentage home footage used for daycare x percentage time used for daycare
Running a home daycare allows the owners to deduct, as a whole or part, of the meals and snacks that are given to the kids within the daycare. Such a deduction saves owners money for home daycares that provide food for the children, and all that they need is to track the food expenses or having standard meals for each kid. According to IRS, the standard rates for meals and snacks are; breakfast = $1.31, lunch = $2.46, Dinner = $2.46, and snack = $0.73 per eligible child. Assuming a daycare has 4 children, then amount deductible will be:
The daily total cost of meals will be $27.84, and this is multiplied by the total number of days when the daycare was in operation to get the net deductible annual value.
Supplies and equipment
The equipment that children use within the home daycare, including games and toys, as well as, other equipment are treated as business expenses, hence making them deductible from FDC taxes. Typically, they are part of the capital expenses because they facilitate the stay of the kids within the daycare. Further, upkeep and maintenance expenses for the playgrounds used by the children are also deductible. Supplies within a home daycare include kids’ diapers, wipes, and baby gear, as well as office supplies that are used to run daily activities. Owners should keep the receipts for such purchases to assist in calculating the tax deductions. Supplies and costs associated with the day care services are treated as direct or indirect expenses and their deductions are discussed below.
Business expenses for home daycares are subjected to a tax deduction and the owners should keep track of such expenses. Some of these expenses include licensing, costs related to training, and joining professional organizations. Other expenses include advertising costs, legal fees for business, as well as, insurance. Direct expenses are deductible in full without any rate applicable. Indirect expenses are subjective to the proportion of the home used for business. For instance, if total indirect expenses are $10,000 and 30% of the home is used for daycare services, then the total deductible value will be $10,000 * 30% = $3,000.
The car mileage deductions consider the driving, which is associated with the family day care activities. For instance, it includes the transport related to business matters or the transport of the children enrolled in the daycare. The owners must keep proper and accurate annual records for their mileage driven. The IRS assumes that if 50% of any trip was a business related to daycare, then the mileage is subject to a deduction with a rate of $0.545 per mile. Suppose the total business mileage is 10,000 miles, then the total deductible is $0.545 x 10,000 = $5,450.
Tax deductions for FDCs in Canada
The Canada Revenue Agency considers individuals who own family daycare to be self-employed individuals. Hence, they are required to file tax returns. Daycare income is treated as the money received from clients plus grants received, indicating that if a daycare owner uses a portion of the grant to purchase a capital good, then nothing can be claimed during filing taxes.
Business and office expenses
Family daycare owners are allowed to deduct all the direct business expenses they incur during their daycare business activities. These expenses include vehicle expenses, trip expenses, advertising, maintenance, and repairs. To calculate the net deductible value, the daycare footage is divided by the total footage for the home to get the percentage footage. Then, the figure is multiplied by total expenses to get the daycare business expenses and the percentage of tax that can be claimed.
For owners using both the home for personal use and daycare, the above percentage is multiplied by the total time (hours) in a week to reach at the net time and expenses to deduct from tax due. Expenses associated with stamps, receipt books, papers, and envelopes used for daycare are deducted directly as a whole. However, if the business is combined with other personal businesses, the portion of the daycare business (Area used for daycare business/total area of the home) is multiplied by these supplies expenses.
Supplies expense for daycare = Area used for daycare business/total area of the home * supplies expenses.
Mileage and other car expenses
Your mileage is treated as a vehicle expense, and you can claim it on tax returns. Mileage assists in determining depreciation costs on vehicles and fuel used for the daycare business. If the vehicles are used fully for daycare activities, expenses are fully deductible, meaning that they can be claimed when filing taxes. They include vehicle insurance, oil, license, registration, repairs, and interest paid on the loan that bought the vehicle. If the vehicle is used for other personal uses together with the daycare activities, then the portion of mileage used for daycare is multiplied by the total operating expenses to get the net daycare vehicle expenses claimable.
Deductible vehicle expense = Operational expenses * (mileage used for daycare/total mileage expenses)
Rooms that daycare owners use for business are used to calculate the net deductible amount when filing taxes. For instance, the CRA uses the footage for these rooms to calculate the business portion. And then multiply the footage by the total expenses incurred by the owner. However, this is subject to the net time used for daycare activities.
Home office expenses (rooms) = Area used for business/total area * total expenses.
Net claimable home expenses
(time (hours) for daycare business/total hours used in a day) * (Area used for business/total area) * total expenses.
Telephone call expenses
Some costs associated with long-distance calls may be claimed made with primary reason emanating from daycare activities. For instance, there may be airtime expenses used for cellular calls that relate to business income. The expense is fully deductible. Also, if the business has leased a fax machine, only the percentage of its lease. Which affects the daycare business is deductible. However, if the daycare has bought the fax machine, the lease is not claimable.
Internal Revenue Services. (2017). Publication 587 (2017), Business Use of Your Home. Accessed from https://www.irs.gov/publications/p587#en_US_2017_publink1000226376
Government of Canada. (2018). P134 Using Your Home for Daycare.