The Tax Advantages of Starting Up a Daycare in Your Home
You are in the childcare business. Now what? You must decide a number of pressing
questions. How to organize my business? What forms do I need to keep track of? What logs
of information do I need to keep? Why does this all seem so confusing? What planet do
accountants and IRS agents come from anyways?
Take a deep breath and we will try to create some simple rules to add some sanity to the
confusion. I’m going to start with a couple of advantages to running a child care center
from your personal home and will address some of the tricks to record keeping in its own
Why is child care a business like no other? You are allowed to follow your own special
rules not allowed by any other business run out of your home. See the IRS is not all bad.
Oh my, I did just say that?
You are allowed to count all the areas in your home used regularly for your business –
not just those used exclusively for childcare when determining the space in the home that
you can deduct. You are the only business that is allowed this treatment.
Here comes the real meat and potatoes, the forms and code sections. (Ugh.)
The most important calculation that you need to understand is a formula called the
“Time-Space Calculation.” This is the calculation that allows you to make your personal
expenses that no one else can deduct, as business expenses. In order to do this the IRS
demands that you report these expenses separately on form 8829.
First we need to determine the space component of the calculation. Step one is to draw a
floor plan of your home. Notice I said floor plan not blueprint. We are trying to
determine the square-footage of your rooms a percentage of your home – we’re not trying to
rebuild the home! Each room is labeled one of three titles: 100 percent Personal, 100 percent
business, shared. The IRS has ruled that for a room to be counted as shared it must only
be used regularly for business, not exclusively. Each year you will need to verify the space
component with a new floor plan of the home.
The second component of the calculation is the time component. This seems pretty straight
forward. At first you may just count the hours when children are present but you would be
missing out on all the other time spent in you home working on your business. These hours
include time spent preparing for the day, record keeping, and appointments with parents,
and cleaning up from the day. Once you have determined the space percentage and the time
spent percentage you simply multiply the two percentages together and you are set to go.
Okay. Now what?