Are you looking for ways to save money on your childcare business taxes? In this article, we provide an overview of the top ten tax deductions for childcare businesses. Take advantage of as many of these tax breaks as you can, and you will come through tax season owing a little less to Uncle Sam. Read on to find out more.
IRS Tax Deductions and Your Childcare Business
A tax deduction is an item you can subtract from your taxable income to reduce the amount of taxes you owe the U.S. Government. The IRS predetermines these tax deductions, and many of them are specific to a particular industry. Fortunately for childcare providers, the childcare industry offers many potential tax deductions to business owners. Following are some of the most common tax deductions for childcare providers.
If you employ a team of childcare staff, then the expenses related to your employees qualify you for tax deductions. Tax-deductible employee expenses include employee wages and salaries, paid vacation, benefits, and insurance. Notably, as the business owner, you cannot include your own salary when calculating employee expenses.
It takes a lot of specialized supplies to run a childcare business. Fortunately, your daycare supplies are tax-deductible, provided you keep good records and hang onto your receipts. Tax-deductible daycare supplies include the following categories.
- Safety supplies
- Cleaning supplies
- Furniture and equipment
- Toys and games
- Arts and crafts
- Educational materials
- Classroom items
- Infant care supplies
- Kitchen supplies
- Childcare technology
What about other business-related expenses, like your office supplies? Let’s take a look.
The IRS guidelines indicate that expenses that are both “ordinary and necessary” to running your childcare business can be considered tax-deductible. Again, the burden falls upon you as the business owner to keep track of your receipts, separate business expenses from personal expenses, and maintain good records to substantiate your business purchases as “ordinary and necessary.” Office supply expenses may include:
- Ink and toner
- Business envelopes, postage, and mailing supplies
- Pens and pencils
- Office furniture
- Office technology
- Folders, binders, notebooks, planners, and calendars
- Staplers, staples, tape, rubber bands, paper clips, scissors, and the like
- Office storage, like filing cabinets, shelves, drawers, and bins
- Safety and cleaning supplies
Occasionally, you will make purchases for your childcare facility that are exceptionally large expenses, such as playground equipment. How do you handle these big-ticket items? We’ll take a look at those next.
Capital expenditures refer to purchases made by a business as an investment to generate revenue, but which depreciate over a number of years. For example, you could spend $20,000 on new playground equipment for your childcare center. If you count the full purchase price in your budget for that calendar year, it will have a huge impact on your profits. However, spreading out the $20,000 expenditure over a number of years to account for depreciation is more favorable to your bottom line and your business taxes.
Food and Beverage Expenses
Likely, your childcare center provides meals and/or snacks for the children in your care. If that’s the case, your food, and beverage expenses are tax-deductible. You will need to keep track of student attendance and the number of meals served, as well as your daycare grocery receipts, in order to accurately calculate food-related expenses.
Vehicle and Travel Expenses
Expenses related to your company vehicle and job-related travel are tax-deductible. These expenses include those incurred from the cost and maintenance of your company car, including oil changes, repairs, and gas, as well as expenses related to business travel, such as a pick-up/drop-off service or travel to professional conferences. Your commute to and from work, however, does not count toward your mileage deduction.
Bank Fees and Interest
The monthly fees associated with your business bank account are eligible for tax deduction. In addition, if you took out a loan to start your childcare business, the interest you pay on the loan is deductible as well.
Professional Memberships, Fees, and Licenses
Do you belong to any professional organizations in the childcare industry? Membership dues and organizational fees are also tax-deductible; the fees associated with your daycare license are too.
What kind of advertising do you do for your childcare business? The money you spend on any form of advertising related to your business, from print ads to online marketing campaigns, can be deducted from your taxes.
Business Use of Home
Many daycare owners operate their business right out of their homes. Are you one of them? If so, you may be able to write off part of your mortgage or rent payment, insurance, and utilities if you are able to substantiate the business use of your home. Check out this article to learn more about deducting your in-home childcare business.
Although the tax deductions we discussed in this guide are some of the most common ones available to childcare business owners, they aren’t the only ones. You may also be eligible for the Qualified Business Income Deduction (QBI), the Employee Retention Credit (ERC), the Work Opportunity Tax Credit (WOTC), and the Small Business Health Insurance Credit. That’s a lot of potential savings on your childcare business taxes!
Feeling overwhelmed by trying to figure out which tax deductions you can take for your childcare company? That’s what the experts at Honest Buck Accounting are here for. Tax time is our busiest season, so don’t wait to get in touch with us. Schedule a call to learn more about our tax services, especially for Early Childhood Education businesses, today.