Childcare forms

Tax Advantages of Starting 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 special chapter.

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 and 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 and are not trying to rebuild the home! Each room is labeled one of three titles: 100% Personal, 100% 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?

Direct vs. Indirect Expenses

The easiest way to define direct business expenses is to call them expenses that you simply wouldn't have if you hadn't decided to start a daycare. Advertising, Liability Insurance, Toys, Art Supplies, etc. all fall into this category.

Indirect expenses are defined as those shared by you as an individual and your business. Rent, Mortgage Interest, Real Estate Taxes, Utilities, Household supplies, Home Owners Insurance, Repairs and Maintenance, etc. fall into this categor