In general, the IRS allows operators of daycare centers to take ordinary and necessary deductions needed to generate income. Aside from traditional business deductions, home daycare operators can take advantage of an expanded deduction for business use of homes—even if no rooms are used exclusively for the daycare.
Here is the home daycare tax deductions list:
- Expanded Business Use of the Home
- Transportation
- Qualified Business Income Deduction
- Contributions to Retirement Plans
- Medical Insurance
- Standard Meal Allowance
- Advertising
- Toys/Arts & Crafts
- Insurance
- Employee Wages
- Bank Fees & Interest
- Membership Dues
- Office Supplies
- Bookkeeping & Accounting
1. Expanded Business Use of the Home Deduction
If you operate a daycare out of your home, a large portion of your expenses will have mixed personal and business use. The deductible amount of home expenses for home daycare providers is determined by using the “time percentage” and the” time/space percentage” methods of allocation:
- Deductible direct expenses are calculated using the time percentage:
- Direct expenses are home expenditures solely attributable to daycare operations.
- For example, replacing a soiled carpet in a daycare space.
- Indirect expenses are calculated using the time/space percentage:
- Indirect expenses are home expenditures that impact both daycare and personal space.
- Examples of indirect expenses include maintenance to common areas (such as plumbing and heating), utilities, and insurance.
The time/space percentage is computed by multiplying two ratios.
Time/Space Percentage | = | ✕ | Square Footage of Home Used For Business Regularly | |
Total Number of Hours in the Year, Such as 8,760) | Total Square Footage of Home | |||
(Time Percentage Ratio) | (Space Percentage Ratio) |
Note that the hours spent working on the business include hours spent caring for children and hours spent performing the functions listed below.
- Planning activities for the children
- Cleaning
- Laundry
- Administrative tasks, such as bookkeeping and social media management
- Correspondence with parents
The IRS allows you to include the 30 minutes before the daycare opens and 30 minutes after closing as daycare time automatically.
Most businesses are required to use their home office exclusively for business purposes. Meanwhile, home daycare businesses can use their home for both personal and business purposes and allocate expenses based on time. Learn more about standard deduction that applies to most businesses through our guide on the home office deduction.
Alia, a taxpayer, uses the following areas of their home in running a home daycare center regularly:
Rooms | Square Footage | |
|---|---|---|
Daycare Use | Total | |
Living Room | 400 | 400 |
Kitchen | 200 | 200 |
Dining Room | 200 | 200 |
Guest Room #1 (Exclusive for Daycare) | 150 | 150 |
Guest Room #2 (Daughter’s Room But Also Used for Daily Naps) | 150 | 150 |
Hallway | 60 | 60 |
2 Bathrooms | 120 | 120 |
Basement (for Toy Storage) | 400 | 400 |
Master Bedroom & Bath | 0 | 320 |
Total | 1,680 | 2,000 |
The daycare is open from 6:30 am to 6:30 pm, Monday through Friday, and Alia does all their administrative work during the day when the kids are napping. Since the IRS allows one-half hour before opening and after closing to prepare for the day and cleanup, this brings the total business time per day to 13 hours per day, five days per week.
Calculation of Use of Home Deduction
- The space percentage is calculated by dividing the square footage used for business by the total square footage of the home:
- 1,680 ÷ 2,000 = 84%
- The time percentage is calculated by first calculating the total hours worked in a year:
- 13 per day × 5 days per week × 52 weeks = 3,380 yearly hours
- The total years calculated are then divided by 8,760, which represents the total hours in a year:
- 3,380 ÷ 8,760 = 39%
Keep in mind that the time/space percentage calculation relates to the costs of maintaining and improving the home. Other operational expenses are eligible to be deducted in full.
Direct expenses are allocated using the time percentage, whereas indirect expenses are allocated using the time/space percentage, as shown below.
Allocation Percentage | Deductible Amount | ||
|---|---|---|---|
Direct Expenses | |||
Painting for Bedroom #1 | $200 | 39% | $78 |
Total Direct Expenses | $200 | ||
Indirect Expenses | |||
Interior Painting for Whole House Except Bedroom #1 | $1,800 | 32% | $576 |
Mortgage Interest | $6,000 | 32% | $1,920 |
Depreciation | $10,000 | 32% | $3,200 |
Utilities | $2,400 | 32% | $768 |
Property Taxes | $3,000 | 32% | $960 |
Homeowners Insurance | $2,000 | 32% | $640 |
Trash Service | $240 | 32% | |
Cable TV | $1,000 | 32% | $320 |
Total Indirect Expenses | $26,440 | ||
2. Daycare Provider’s Transportation Deduction
Transportation expenses may be deducted either by taking a deduction for the standard mileage rate provided by the IRS or by deducting actual expenses:
- Standard Mileage Deduction: The IRS sets the standard rate for business mileage and adjusts that number every year. When using the standard mileage method, no additional expenses can be taken for the regular operation of the vehicle. This means that when using the standard mileage rate, no additional deduction could be taken for maintenance or repairs of the vehicle:
- When taking the mileage deduction, you would multiply the standard mileage rate for the year by the number of business miles driven.
- Actual Expense Deduction: This method is for those wanting to take expense deductions for vehicle depreciation, maintenance, or repair. If the vehicle is used 100% for business, you may take your allowable expense deductions in full:
- The deduction for this method is calculated by dividing your business mileage by the total mileage driven on the vehicle for the year. Multiply that percentage by each vehicle expense to get to the deductible amounts.
3. Qualified Business Income Deduction
The qualified business income deduction (199A deduction) allows businesses to deduct 20% of qualified business income. This deduction does not reduce the income subject to self-employment tax.
Computing the 199A deduction can be a complex process, and there are restrictions on who may take it. Income limitations may also apply. While there are intricacies in the calculation, the qualified business income deduction (QBID) can be a useful tool in lowering the taxable income for a daycare center.
4. Contributions to Retirement Plans
Savings Incentive Match PLan for Employees individual retirement accounts (SIMPLE IRAs) are a popular retirement plan option for small businesses. Deductible contributions include those made for you, as the business owner, and those made for employees:
- Self-employed Contributions: For 2024, the IRS allows a maximum contribution of $16,000 for individuals under 50 years old. Those 50 or over can contribute up to $19,500:
- Note that your contribution is limited to the self-employment income from the business for which the SIMPLE IRA plan was set up.
- The deduction for your personal contribution is taken on IRS Form 1040 (Schedule 1), line 16.
- Employer Contributions: Contributions made for an employee are a deductible business expense on Schedule C. In general, you must match the contributions made by your employees up to the first 3%:
- SIMPLE IRAs generally do not have a separate annual informational filing requirement, which makes them an optimal choice for small businesses.
5. Medical Insurance
Self-employed taxpayers—including daycare providers—can deduct the premiums for health insurance premiums of themselves, their spouse, and all their dependents. Qualified health insurance includes:
- Insurance purchased from healthcare.gov (net of any credits)
- Part B and Part D premiums withheld from your Social Security
- Medicare supplement plans
- Any health insurance paid directly by the taxpayer
You cannot receive a deduction for health insurance paid by an employer and excluded from your taxable wages.
Self-employed health insurance premiums are not deducted on Schedule C. Instead, they are deducted as an adjustment to income on Form 1040, Schedule 1, line 17.
6. Standard Meal Allowance
In place of deducting actual food costs, daycare providers may deduct a standard meal allowance for food provided in the course of daycare operations. The meal allowance is:
- A simple way to get the deduction without an oppressive amount of recordkeeping
- Separate from the cost of items including paper cups, plates, and plastic cutlery, which would qualify as separate deductions
The actual cost of meals and snacks is permitted if the standard meal allowance option is not taken.
The IRS provides the per diem rates in IRS Publication 587, which is updated annually for inflation.
The following meal and snack rates can be used daily for one breakfast, one lunch, one dinner, and three snacks for each child.
2023 Standard Allowance | ||||
|---|---|---|---|---|
Home Daycare Location | Breakfast | Lunch | Dinner | Snack |
Alaska | $2.59 | $4.87 | $4.87 | 97 cents |
Hawaii | $1.91 | $3.55 | $3.55 | $1.12 |
All Other US States | $1.66 | $3.04 | $3.04 | 97 cents |
The following children are cared for from 7:30 am to 5:30 p.m. in a Pennsylvania home daycare.
John | Joe | Jennifer | Julie | |
|---|---|---|---|---|
Breakfast | $1.66 | $1.66 | $1.66 | $1.66 |
Lunch | $3.04 | $3.04 | $3.04 | $3.04 |
Dinner | $3.04 | $3.04 | $3.04 | $3.04 |
Snack 1 | 97 cents | 97 cents | 97 cents | 97 cents |
Snack 2 | 97 cents | 97 cents | 97 cents | 97 cents |
Snack 3 | 97 cents | 97 cents | 97 cents | 97 cents |
TOTAL | $10.65 | $10.65 | $10.65 | $10.65 |
Given, the deduction for one full day using the standard meal allowance is $42.60 ($10.65 × 4).
7. Advertising
Daycare providers may incur a variety of deductible advertising costs in the course of operations. These may include expenses related to web development and design, social media maintenance, and tangible marketing supplies.
8. Toys/Arts & Crafts
Deductions can be taken for supplies used to occupy and engage the children throughout the course of the day. Expenses for toys, tools, and other aids used for daycare activities can reduce taxable income.
Space used to store the toys can be included in the business use of home calculation.
9. Insurance
Daycare insurance protects the business against property loss or claims of neglect. Premiums for preventative loss protection are deductible expenses.
10. Employee Wages
As the daycare grows, it may be necessary to hire staff to maintain operations—and employee wages can be included as deductions for home daycare. Tax withholding on wages will need to be remitted to the IRS and state authorities regularly, and the frequency of remittance will depend on the amount of wages being paid. You may read the IRS’s depositing and reporting employment taxes page for additional details on deposit frequency.
11. Bank Fees & Interest
Payment transfer fees, interest, and other bank assessments should be documented and deducted on the tax filing for daycare centers.
12. Membership Dues
Costs of membership in networking organizations are deductible expenses. These organizations may include groups that specialize in the needs of daycare providers or a local chamber of commerce.
13. Office Supplies
In addition to supplies used by the children for daily activities, the cost of office supplies and other products can be taken as deductions for home daycare.
14. Bookkeeping & Accounting
Daycare operations can involve recordkeeping and accounting functions that an owner may want to outsource—and payments made to bookkeeping and accounting professionals are a deductible expense. In addition, daycare providers may deduct the cost of bookkeeping software.
Related resources:
Frequently Asked Questions (FAQs)
The IRS states that “regular use” means that a specific area of your home must be used for daycare services on a “regular basis.” Incidental or occasional business use is not regular use. Unlike most businesses, a deduction can be taken for space used for daycare operations even when it is sometimes used for nonbusiness purposes.
No. Costs to care for your own children cannot be deducted as a daycare expense, even if their care is simultaneous to the care of unrelated children.
In general, reimbursements offset the deduction for food. Reimbursements would only be taxable to the extent that they exceed the daycare’s food costs.
Bottom Line
In addition to the ordinary and necessary business expenses that can be deducted, home daycare centers can take advantage of a unique allocation of home expenditures, such as those in our home daycare tax deductions list above, to reduce tax burdens further.
