Taxation of Child Care Providers
Dear Child Care Provider:
There are some unique aspects of Child Care Providers that the IRS will examine should you be audited. The IRS will look for income paid in cash that may be understated or expenses paid in cash that may be overstated. They will also review the child care provider's recordkeeping.
By providing child care in your home, you are entitled to certain deductions with respect to your home. To claim the business-use-of-the-home deduction, you must meet the following two requirements:
(1) You must be in the trade or business of providing day care for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.
(2) You must have applied for, been granted, or be exempt from having, a license, certification, registration, or approval as a day care center or as a family or group day care home under state law.
The qualifications for business-use-of-the-home expenses are different for child care providers than for other businesses. Qualifying usage does not require exclusive use. However, there is a regular basis usage test. If the business use of the area is merely an incidental or occasional business use, expenses incurred for that area are not deductible.
If a room is available for day care use throughout each business day and is regularly used as part of the routine provision of day care (including a bathroom, an eating area for meals or a bedroom used for naps), the square footage of that room is considered as used for day care throughout each business day. You are not required to keep records of the specific hours of usage of such a room during business hours. Also, the occasional non-use of such a room for a business day does not disqualify the room from being considered regularly used. However, the occasional use of a room that is ordinarily not available as part of the routine provision of day care (e.g., a bedroom ordinarily restricted from day care use but used occasionally for naps) is not considered as used for day care throughout each business day
There are other expenses which you may deduct as a child care provider. Examples include if the children play outside in the yard, a percentage of your lawn mowing service may be deductible. Another deductible expense relates to laundry facilities and soap to wash towels, blankets, etc. used by the children.
In addition, you may have vehicle expenses to which the "listed property" rules apply. You can deduct either the business use percentage of actual vehicle expenses incurred primarily for business or the standard mileage rate for the business miles. However, since vehicles are listed property, stringent substantiation rules apply. You need to insure that your records meet these requirements otherwise no deduction will be allowed. Different substantiation rules apply if your business uses vans for transporting the children.
You are also required to issue 1099's for expenses paid to unincorporated vendors and independent contractors for services rendored to you in excess of $600. You may also be required to withhold taxes and file payroll tax returns and w-2's for employees.
As you can see, there are numerous tax issues to consider when operating a day care business from your home. Please call me with any questions that you have.
Farquharson, Pointon & Lepsetz, CPA's
31500 W. Thirteen Mile Road, Ste. 114
Farmington Hills, Michigan 48334
Tel # 248-539-9999 (Ext. 1)
Steven Lepsetz | 02/03/2014