September 25, 2018
Day Care Providers Enjoy Special Tax Benefits
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Article Highlights:
Business Use of the Home – Generally, to be able to take a deduction for business use of the home, the tax law requires the business portion to be used exclusively for business. However, the tax law carves out a special allowance for day care facilities, allowing prorated use. But that exception to the exclusive use requirement applies only if the owner or the operator of the day care facility:
The day care facility exception does not apply if the services performed are primarily educational or instructional in nature (e.g., musical instruction). However, the exception does apply if the services are primarily custodial and if the educational, development or enrichment activities are only incidental to the custodial services. The determination depends generally on the facts and circumstances of each particular case.
When calculating the percentage of business use of the home, both the space used to operate the day care business and the amount of time that the space is used to provide day care – including preparation and cleaning time – are factors.
Although the business use of the home deduction cannot exceed the gross income of the business, and there is an order in which the deductions are allowed while applying the gross income limitation, the deduction is generally made up of the following prorated expenses:
Some providers have rooms such as play rooms or sleeping rooms set aside that are used exclusively for their business. In these cases, a separate calculation for the exclusive-use space should be made using 100% use, and then that amount should be added to the deduction for the prorated portion of the home.
Deduction for Meals – Family day care providers are allowed to deduct the cost of meals provided to the children in their care. However, separating the cost of food between that used for day care versus for personal use can be a record-keeping nightmare.
To minimize disputes with family care providers about the amount of their meal deduction and the quality of their substantiation, IRS will allow them to use standard meal and snack rates to compute the deductible cost of food instead of deducting actual costs. Recordkeeping is also simplified if standard rates are used. The simplified deduction for each meal and snack bought and served to an eligible child during day care is equal to the US Department of Agriculture's Tier I Child and Adult Food Care Program’s (CAFCP’s) reimbursement rates for meals and snacks served in day care homes. The rates are adjusted annually, and the rates for 2018 are:
The rates do not include the cost of nonfood supplies (e.g., utensils, paper napkins and paper towels), which may be deducted separately. The number of meals per day per child is limited to a maximum of one breakfast, one lunch, one dinner and three snacks. The following is an example of the daily maximum allowance in the contiguous states (the maximum for Alaska and Hawaii will be higher).
If the provider receives some form of reimbursement or subsidy, they can deduct only the part of the simplified rate that exceeds the reimbursed amount.
The rates may be used only by taxpayers (whether or not they are licensed, registered or otherwise regulated) providing care in their homes to unemancipated children, and only with respect to children for whom they are paid to care and who don't reside in the home.
Family day care providers who use the simplified rates must use them to deduct meals and snacks for the entire tax year, but the providers can switch to deducting actual substantiated amounts in another tax year.
Family day care providers using the standard rates must keep records substantiating their computation of the total deductible amount. The records should include the name of each eligible child, the dates and hours of their attendance in the family day care and the type and quantity of meals and snacks served. A number of commercially available software programs can maintain the required records.
Other Deductions – Other deductions, if adequately substantiated, can include:
- Business Use of Home
- Prorated Use
- Owned Home
- Rented Home
- Exclusive Use
- Meal Allowance
- Other Deductions
Business Use of the Home – Generally, to be able to take a deduction for business use of the home, the tax law requires the business portion to be used exclusively for business. However, the tax law carves out a special allowance for day care facilities, allowing prorated use. But that exception to the exclusive use requirement applies only if the owner or the operator of the day care facility:
(1) Has applied for (and the application has not been rejected) a license, certification, registration or approval as a day care center or a family or group care home under the provisions of any applicable state law;
(2) Has been granted (and the grant has not been revoked) a license, certification, registration or approval as a day care center or a family or group day care home under the provisions of any applicable state law; or
(3) Is exempt from having a license, certification, registration or approval as a day care center or a family or group day care home under the provisions of any applicable state law.
(2) Has been granted (and the grant has not been revoked) a license, certification, registration or approval as a day care center or a family or group day care home under the provisions of any applicable state law; or
(3) Is exempt from having a license, certification, registration or approval as a day care center or a family or group day care home under the provisions of any applicable state law.
The day care facility exception does not apply if the services performed are primarily educational or instructional in nature (e.g., musical instruction). However, the exception does apply if the services are primarily custodial and if the educational, development or enrichment activities are only incidental to the custodial services. The determination depends generally on the facts and circumstances of each particular case.
When calculating the percentage of business use of the home, both the space used to operate the day care business and the amount of time that the space is used to provide day care – including preparation and cleaning time – are factors.
Example – Edna uses her living room, kitchen and bathroom ten hours a day, five days a week, to provide licensed day care services. The home is 2,400 square feet, and the living room, kitchen and bathroom are a combined 1,400 square feet. Edna’s percentage use of her home for business is determined as follows:
Although the business use of the home deduction cannot exceed the gross income of the business, and there is an order in which the deductions are allowed while applying the gross income limitation, the deduction is generally made up of the following prorated expenses:
- For an Owned Home:
- Mortgage interest
- Home taxes
- Utilities
- Repairs
- Homeowner’s insurance
- Depreciation
- For a Rented Home:
- Rent
- Utilities
- Repairs
- Renter’s insurance
Example: Edna, in our prior example, provides family day care services out of her rented home, for which she pays $2,200 a month in rent and $3,100 for utilities for the year. Her business use of the home deduction is determined as follows:
Rent ($2,200 x 12)……… $26,400
Utilities…………………………. 3,100
Total…………………………….. $29,500
The prorated amount (her deduction for the year) is $5,121 (17.36% of $29,500)
Rent ($2,200 x 12)……… $26,400
Utilities…………………………. 3,100
Total…………………………….. $29,500
The prorated amount (her deduction for the year) is $5,121 (17.36% of $29,500)
Some providers have rooms such as play rooms or sleeping rooms set aside that are used exclusively for their business. In these cases, a separate calculation for the exclusive-use space should be made using 100% use, and then that amount should be added to the deduction for the prorated portion of the home.
Deduction for Meals – Family day care providers are allowed to deduct the cost of meals provided to the children in their care. However, separating the cost of food between that used for day care versus for personal use can be a record-keeping nightmare.
To minimize disputes with family care providers about the amount of their meal deduction and the quality of their substantiation, IRS will allow them to use standard meal and snack rates to compute the deductible cost of food instead of deducting actual costs. Recordkeeping is also simplified if standard rates are used. The simplified deduction for each meal and snack bought and served to an eligible child during day care is equal to the US Department of Agriculture's Tier I Child and Adult Food Care Program’s (CAFCP’s) reimbursement rates for meals and snacks served in day care homes. The rates are adjusted annually, and the rates for 2018 are:
| Year | States | Breakfast | Lunch | Dinner | Snack |
| 2018 | Contiguous States | $1.31 | $2.46 | $2.46 | $0.73 |
| Alaska | $2.09 | $3.99 | $3.99 | $1.19 | |
| Hawaii | $1.52 | $2.88 | $2.88 | $0.85 |
The rates do not include the cost of nonfood supplies (e.g., utensils, paper napkins and paper towels), which may be deducted separately. The number of meals per day per child is limited to a maximum of one breakfast, one lunch, one dinner and three snacks. The following is an example of the daily maximum allowance in the contiguous states (the maximum for Alaska and Hawaii will be higher).
| Meal | Number Allowed | 2018 Rate | 2018 Max |
| Breakfast | 1 | $1.31 | $1.31 |
| Lunch | 1 | $2.46 | $2.46 |
| Dinner | 1 | $2.46 | $2.46 |
| Snack | 3 | $0.73 | $2.19 |
| 2018 Daily Max per Qualified Child | $8.42 | ||
If the provider receives some form of reimbursement or subsidy, they can deduct only the part of the simplified rate that exceeds the reimbursed amount.
The rates may be used only by taxpayers (whether or not they are licensed, registered or otherwise regulated) providing care in their homes to unemancipated children, and only with respect to children for whom they are paid to care and who don't reside in the home.
Family day care providers who use the simplified rates must use them to deduct meals and snacks for the entire tax year, but the providers can switch to deducting actual substantiated amounts in another tax year.
Family day care providers using the standard rates must keep records substantiating their computation of the total deductible amount. The records should include the name of each eligible child, the dates and hours of their attendance in the family day care and the type and quantity of meals and snacks served. A number of commercially available software programs can maintain the required records.
Other Deductions – Other deductions, if adequately substantiated, can include:
- Toys and games
- Computer and software
- Toilet supplies and diapers
- Auto expenses for travel for field trips and business
- Licenses and permits
- Recordkeeping supplies
- Wages paid to helpers
- Other related expenses
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