If you operate your childcare business out of your home, you may be qualified for the home office tax deduction. The IRS sets forth guidelines for at-home daycare centers to help childcare business owners assess whether they are eligible for the home office tax deduction. In this article, we will take a look at the home office tax deduction, including who qualifies and how to deduct your home office on your taxes.
What Is the Home Office Deduction and Who Is Eligible?
The home office deduction is a tax deduction created by the Internal Revenue Service (IRS) for individuals who use part of their home for business purposes. The home office deduction is made available to homeowners and renters alike, and it applies to all kinds of homes. Individuals who are self-employed, independent contractors, freelancers, or those working in the gig economy are eligible to obtain the home office deduction.
The Tax Cuts and Jobs Act of 2017 suspended the home office deduction for individuals who are employees of a company from 2018 through 2025. Under these regulations, employees who receive a paycheck or W-2 from an employer are not eligible for the home office deduction, even if they work from home part-time or full-time for their employers.
There are only two basic requirements to qualify for the home office deduction. First, the taxpayer must use a portion of his or her home exclusively and regularly for conducting business. Second, the taxpayer’s home must be his or her principal place of business.
Home Office Deduction Guidelines for Childcare Business Owners
The federal government issued special guidelines regarding the home office deduction for childcare business owners who operate their daycare center from their home.
Ordinarily, an individual must be able to reserve his or her home office space regularly and exclusively for conducting business. However, the government makes allowances for at-home daycare centers with the understanding that the spaces within your home that you use to care for the children in your daycare program are likely some of the same spaces you and your family inhabit for personal use during non-business hours.
With this in mind, the IRS sets forth the following two requirements specifically for daycare business owners who operate their childcare program out of their home:
- The business must provide daycare for children, people aged 65 or older, or people who are physically or mentally unable to care for themselves.
- The business must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law.
If you operate your childcare business out of your home and meet the above requirements, you may be eligible to take the home office deduction.
How to Take the Home Office Deduction
You can use either of two methods to figure out your home office deduction: the regular method or simplified method.
If you opt to use the regular method for calculating your home office deduction, you must determine the actual expenses of your home office. Such expenses may include your mortgage interest, utilities, insurance, repairs, and home depreciation. In addition, as an at-home daycare owner, you will need to factor in the square footage of your daycare space as a percentage of your total home square footage, as well as the percentage of time (in hours per week or per year) your designated home office area is used for daycare operations.
As you can imagine, calculating your home office deduction using the regular method can become complex, but it does have its advantages. You may be able to claim a larger tax deduction using the regular method than the simplified method, which caps the square footage of your home office—and therefore limits your total deduction. Self-employed taxpayers using the regular method of deduction will need to file IRS Schedule C, Profit or Loss from Business (Sole Proprietorship) and calculate their deduction with Form 8829, Expenses for Business Use of Your Home.
We recommend working with your professional tax accountant to calculate your home office deduction with the regular method to ensure all factors have been applied to your unique situation.
Alternatively, you can use the simplified method for calculating your home office deduction. Instead of determining actual expenses, you can use the prescribed rate of $5 per square foot of the portion of your home used for business purposes to figure your business use of home deduction. This method is much easier for individuals to use, but it does cap the allowable home office square footage at 300 square feet, or a $1,500 total deduction.
Depending on your individual circumstances, the regular method or the simplified method may be the better option when figuring out your home office deduction for your in-home daycare center, and you can try out both methods to determine which one gives you the greater tax advantage.
For more information about the home office deduction, check out this overview from the IRS, as well as this detailed guide to the business use of your home, especially pertaining to daycare business owners.
Here at Honest Buck Accounting, our team of professional accountants is dedicated to helping childcare business owners make the most of government tax credits, including the home office deduction for in-home daycare centers. Need help with your childcare business taxes? Schedule a call with us today to learn how we can help you save money and grow your childcare business.