Planning to start an in-home daycare business? It can be a fun and rewarding business to explore. But it also has some special tax rules you need to know when filing your Schedule C income tax form. What are they?
Business Use of Your Home
Determining the correct percentages for daycare use of your home is a little different than it is for most businesses. While most taxpayers can only claim a home office deduction if the area is used exclusively for the business, daycare providers are allowed to claim areas that are mixed-use.
To figure the percentage of time and spaces being used for daycare activities, add up time spent doing things such as:
- Caring for the children
- Cleaning the home before and after daycare
- Meal planning and preparation
- Preparing activities for the children
- Office administration and keeping records
- Talking with parents and prospective parents
After determining how much time is spent in each area of the home doing these things, you are ready to find the percentage of business use of that room. To do so, use this simple formula:
- Hours of daycare use per week.
- Total hours in the week (168).
- Divide the first number by the second number. This is the percentage of business use of this particular room.
- Repeat for all rooms used by the daycare.
- Add up the square footage of all these rooms together.
- Divide the number above by the total square footage of the home. This is the overall business percentage of your home.
Meal Expenses and Allowance
Daycare providers can fully deduct meals but have some limitations. To do so, you may use one of two different methods to claim the cost of food and drinks for the children. These methods are:
- Actual cost. If you are going to claim the actual costs, you must keep detailed receipts. This method also requires that you don't mix personal food purchases with your business purchases. Since this can be very difficult for a small business to do, many choose to use the other method.
- Standard meal and snack rates. Each year, the IRS publishes a guideline showing how much is allowed to be claimed for food if you don't want to keep receipts. For 2014, this amounts to $1.28 for breakfast, $2.40 for lunch or dinner and $.71 for each of three allowed snacks per day.
Calculating these specific amounts can be difficult for a daycare owner and it's best to consult a qualified accountant to help with keeping your books.
But by understanding what can be deducted for your business and what can't, you can make the best choices possible for your business while being cost-efficient and avoiding surprises at tax time. (For more information, contact J H Williams And Co LLP or another company)