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I have a client who has a new child care business. Can you

suggest a list of deductions?...
I have a client who has a new child care business. Can you suggest a list of deductions?
Ask Your Own Tax Question
Answered in 35 minutes by:
1/1/2010
Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2,439
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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HiCustomer

Thank you for using justanswer. Here is a list of deductions pertaining to self employed child care providers:

Child Care Provider Audit Technique Guide

If the link doesn't work, here's the web address you can copy & paste into your web browser:

http://www.irs.gov/businesses/small/article/0,,id=206004,00.html

Please keep in mind though, that alot of these expenses are only available to day care providers that are licensed.

If a day care provider is not licensed, then they may not take any expenses related to the home, such as % of mortgage interest, real estate taxes (of rent), utilities, etc.

Since day care providers are entitled to so many types of deductions not available to almost any other self employed tax payer, they must have VERY good records to substantiate the deductions.

Although the IRS list is very good, there are some additional expenses which were not listed there:

When the child care provider is licensed, EVERYTHING that is in the portion of the home they use for the daycare is depreciable, inlcluding Fair Market Value of all of the furnishings on the date the day care opens, such as the furniture, and appliances of course, but also bedding if the children take naps in the beds, even the pictures on the wall.

I know its difficult to determine FMV for these items, but they should be able to estimate this pretty closely. I don't advocate listing every item individual on the tax return (although the client should keep the list along with their estimated FMV of each item) I just normally list these things as "furnishings" Any new items they purchase after the day care has been in operation I add separately, since they will now have a record of the date/cost of the new items.

Appliances are something I will normally list separately if the client can break down the FMV for each one, simply because they often have a shorter life span due to the extra use.

Note: all of the furnishings must be depreciated according to the business use % that is calculated on Form 8829, business use of home. Ex: client has stove with FMV of $300. Form 8829 has determined that business use of the home is 50%. Depreciable basis for the stove is $150 x 20% ( Macrs % for 5 year property)

The difficult part of all this is that its not unusual for the % to change, based on the number of hours the day care is open, and square footage of the home used, so you will have to keep track that you don't "over depreciate".

For day care providers who are not licensed, then they limited to their "out of pocket" expenses, such as food, toys and equipment purhcased specifically for the day care (such as baby swings, high chairs, play pens, etc) Note: it will be difficult to prove these types of items are solely for the day care if the provider has children of their own that still use these items, so they will want to keep good records re: why they purchased extra .

I hope this helps.
Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2,439
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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