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Hi, the county inspectors (how much of the home can be used for the licensed daycare) and the IRS rules around home office deductions are really two different issues (although related) ... hand on just a sec ans I'll get the IRS rules for you
An important part of the requirement for the IRS home office deduction is that a portion of your residence be used regularly and exclusively for business purposes.
... doesn't actually have to be an "office," it can be a conference room, a lab area, storage room, (a day care facility) or some other type of business usage. If you do have an area that you use regularly and exclusively for business, the tax law permits you to deduct a portion of certain expenses relating to your home. sp for TAX PURPOSES, you have to be sure that your measuring the square feet of areas that are JUST for the day care facility.
Now, If you pass the qualification tests, which means you have a home office, the next step is determining the amount of your deduction.
You've passed the first test (that it's legal to USE the area for your business)
What I call the big four expenses (that can be pro-rated to the area - we'll get to that in just a sec - that you use for business) are the following:
The common denominator among these deductions is that the IRS has devised a single test to determine whether you qualify for all of them. If your working space doesn't meet the "home office" tests, these expenses are either non-deductible personal expenses (such as rent, painting the room or repairing the furnace) or deductible only as itemized deductions (such as mortgage interest or real estate taxes.)
Now the other big group of expenses that can be deducted are pur business expenses that would be there regardless of whether you're using the home of not:
Business Expenses. Costs that are business expenses (ordinary, necessary and reasonable) are deductible even if you don't qualify for the home office deduction. For example, office supplies, postage, and the cost of bringing a second telephone line into your home for business use may deductible. In addition, you may be able to depreciate (or expense) the cost of computers and office furniture you buy to use at home, even if you're not allowed to deduct the cost of the office itself.
The "principal place of business" test is significantly easier to meet than it once was. Currently, a home office will qualify as the principal place of business if:
The test looks at "administrative" and "managerial" activities. Administrative or managerial activities include: billing for services, keeping books and records, ordering supplies, and scheduling appointments. So, you can meet the test even if you perform substantial non-administrative or non-managerial activities outside your home.
The fact that you may conduct management activities in a non-fixed location, such as a car or hotel room, will not cause you to lose the deduction
Now, if you pass the qualification tests, which means you have a home office, the next step is determining the amount of your deduction.
This is a multistage process. First, you must determine which expenses are deductible. Then, you must calculate:
For most types of home office expenses, the amount you may deduct depends primarily on the percentage of the space in the residence that is used for business.
There are two common ways to the business portion of your home:
The first method (number of rooms) looks at the number of rooms used for business, divided by the total number of rooms in your house.
The second method looks at the square footage of the space used for business, divided by the total square footage of the house. Most of your home expenses (such as rent or real estate taxes and mortgage interest) must be multiplied by the larger of these two fractions to determine the portion that's deductible as a home office.
OH, and b y the way DAYCARE PROVIDES HAVE ANOTHER APPROVED WAY TO DO IT...
Day care providers can use "time" method. The IRS provides a special tax break for home day care operators. These business owners can count all the space they regularly use for their day care business as the "business portion of the home" even though the same space is used for personal or family purposes. For example, they may include the bathroom, the kitchen where day care meals are prepared, and the family bedrooms where naps are taken. However, unlike most home business operators, they must prorate these expenses for the hours in which the day care is offered.
And remember the law allows you to take use whichever method yields the larger deduction .. so at the onset you should run the numbers all three ways; For example, if you have an eight-room house and use one room as an office, your business use percentage will be 1/8 or 12.5 percent. Alternately, if your home office was 168 square feet and your home was a total of 2000 square feet, your business use percentage will be 168/2000 or 8.4 percent. In this case, you will have a larger deduction if you use the "number of rooms" calculation. And then the time test for Daycare Provider might be even better... it all depends on your situation
BotXXXXX XXXXXne, remember to separate the (1) ALWAYS fully deductible business expenses - and take every single one you can that's legitimate, from office supplies to business phone lines) from the (2) the HOME OFFICE expenses that have to be factored by percent of use based on space or time (for you)
Hope this has helped
Time rooms or space, do all three
you might have your accountant look at these web pages:
http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/business-use-space-size-home-office-deduction.aspx ... http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/home-office-deduction-converts-personal-expenses.aspx ... and ... http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Home-Office-Deduction
There is a new simplified method ... IF your objective is making this easier ... but for a daycare, I would be t that ime or rooms would yield the higher deduction
Thank you so much.
You're very welcome
Sorry for the "data-dump," but for days cares tis can be a real help
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Lane, please clarify this for me. I have a license to operate my business since since January the whole year I tried to get clientele the whole year in the meantime I had a Job with a w2-form. So technically, what area of the space can I take as business use of home. I was thinking to use only the basement because that is exclusively use for the daycare. I do not know if I could still use the kitchen and the bathroom. Please advise me what deduction could I take for business use of home. Will it be for the whole year 12 month?
You can count the whole year, if you were licensed in January.And since the basement the only room that's used EXCLUSIVELY you can do one of three things:(1) Take the square footage of the basement divided by the total square footage of the house and use that as the factor to apply against existing home costs. So if it's 20%, for example, then you can deduct 20% of your home mortgage interest (or rent), utility bills, home repairs and depreciation.(2) Us the number of rooms to figure what percentage the basement is, of the whole house and use that, or(3) Use the new simplified method, (called the safe harbor, method), where you multiply $5 per square foot (up to 300 square feet) as the TOTAL home office deduction.Remember with method's (1) and (2) you are just using that % as a factor against already existing home costs, like utilities and mortgage ... then you'll add the business specific costs, like a dedicated business telephone line.With the third (simplified, safe Harbor) method, that figures your total home office deduction. The $5.00/sq ft has an assumed other business costs, built into it.Hope this helpsLane