Tax Deductions, Tax Credits, and Depreciation for Childcare Provider
Tax deductions aren’t the only way to pay less to the IRS. Tax credits and depreciation also allow business owners to save on taxes. Specifics for home daycare owners.
Business owners can save on taxes in several ways. Here are four ways business owners might be able to lower taxes:
- Taking a straight tax deduction
- Taking a partial tax deduction
- Depreciating an asset
- Taking a tax credit
Entrepreneurs often can deduct the full cost of certain business expenses on their taxes. Other times, only a portion of the expense may be counted. The list of deductions that may be allowable is extensive. The IRS allows numerous deductions on federal tax returns, and an individual filer may be able to take numerous deductions and credits, depending on his or her situation.
Taking a straight tax deduction is one way to save money on taxes. This means deducting the full cost of an expense from one’s taxable income. To be fully deductible, an expense must be directly related to the business, reasonable and necessary for the business. For a daycare owner, these deductions may include money spent on:
- Transportation of children
- Toys, puzzles, and games
- Dishes such as baby bottles and toddler cups; plates, bowls and utensils
- Diapers, baby wipes, lotions and creams
- Paper towels, paper plates and other disposables
- Cleaning products
- Art materials, paper, printer ink and other consumable supplies
- Bedding, including cots, sheets, blankets, and pillows
- DVDs, CDs and other media for children’s use
- Business license
- Medical expenses for staff (such as TB tests)
- Continuing education
- Employee payroll (if any)
- Advertising costs
Is Food Tax Deductible?
Food for the children may also be deducted if a daycare provider pays for it out of pocket, but if a provider participates in the USDA Child and Adult Care Food Program, then food is reimbursed under that program and is not a tax-deductible expense under this category.
Childcare business owners can, however, deduct the number of their food expenses that exceed the amount reimbursed by the USDA, according to IRS Publication 587. Food consumed by a home daycare provider’s own family generally is not tax-deductible and should not be included in the amount listed as food costs for the daycare.
Partially Deductible Business Expenses for Home Daycare
Partial deductions are a second way to save on taxes. Home daycare owners have expenses that may qualify as partially deductible expenses. Either a portion of the expenses may be deducted, or a percentage of the expenses may be deducted. Some examples:
- Housing expenses, such as rent or mortgage, utilities, and other expenses.
- Vehicles that are sometimes used for personal use
- Food costs
Food costs are “partially deductible” in that not all of the food expenses in the household are deductible. The portion eaten by daycare children is fully deductible; the portion eaten by the provider’s family is not deductible. A possible exception to this rule is if the family members are employees of the daycare. In this instance, generally, 50% of the cost of their meals at work is deductible. If the meals they consume while working are considered to be de minimis benefits, then 100% of the cost may be deductible. For further information, see Chapter 2 of IRS Publication15-B, Employer’s Tax Guide to Fringe Benefits.
If a provider’s family member is an employee, then the food eaten while working in the childcare business may be deductible, either in whole or in part. Owners who are unsure whether or not to take a deduction, or whether to deduct the entire expense or just a portion of the expense should consult their tax professionals for advice.
Tax Credits, Depreciation Not the Same as Straight Tax Deduction
Claiming tax credits is a third way to save on taxes. Tax deductions and tax credits both reduce the amount of taxes owed, but they are not the same thing. Many people confuse them, but if given a clear explanation, most can understand the difference between a tax deduction and a tax credit.
Asset depreciation is a fourth-way business owners can save on taxes. Taking a depreciation on an asset is essentially spreading a deduction over the course of a few years, instead of deducting the entire amount of the expense on one year’s tax return. Instead of reducing (or eliminating) one’s tax bill for one year, it can reduce one’s taxes for each of the years the item is depreciated.
Day Care Record-Keeping
The IRS requires a business owner only to keep “some kind of record” to prove expenses, in order to claim those expenses for the purpose of taking tax deductions on them. Tax professionals recommend keeping the original receipts and possibly other records, such as a written ledger of expenses. The IRS does not require this, but business owners may find it to their advantage.
Home businesses, especially home daycare centers, can save on taxes in many ways, including tax deductions, tax credits and depreciation. As always, careful calculation, following the tax laws and regulations, and proper tax return filing behavior will reduce a tax return filer’s likelihood of running into problems with the IRS.
Disclaimer: This article is for informational purposes; the author is not a tax professional. Readers should consult the appropriate professional for tax or legal advice.