Providing Day-Care Services in Your Home
If you are providing day-care services for children, handicapped persons, or persons age 65 or over and have the appropriate state licenses, your home doesn't have to meet the exclusive use test.
As long as your home is used regularly for day-care services you may deduct a portion of home related expenses (mortgage interest, taxes, insurance, electricity, gas, water, maintenance, etc.).
Computing the Home Related Day-Care Deduction
To determine the deductible amount of home related expenses do the following:
- Figure out your total home expenses.
- Divide the square footage used for your service by the total square footage of your home.
- Divide the total hours of operation by the total hours in the year.
- Multiply the total home related expenses by both fractions determined in 2 and 3.
- Your annual home expenses are $14,000.
- $7,000 mortgage interest
- $1,000 property taxes
- $1,500 utilities (electricity and water)
- $2,000 trash collection
- $1,300 depreciation on the house
- Your home has a total of 2,000 square feet
- You use 1,500 S.F. for your service - 75% (1,500 S.F./2,000 S.F.)
- You operate your service 10 hours a day, five days a week, 300 days per year, for a total of 3,000 hours a year (10 x 300).
- Total hours in the year: 8,760 (24 x 365)
- Your percentage of day-care operations is 34% (3,000/8,760)
- Multiply total home related expenses by both of the above percentages to determine your deduction:
- ($14,000 x 75%) x 34% = $3,570. This is your total deduction.
- The 75% is the space use for day-care services. Determined in step 2.
- The 34% is the percentage of day-care hours for the year. Determined in step 3.
Deduction limited: Your deduction is limited to the amount of net income generated from day-care operations.
Space for day-care related laundry, storage for toys, or a play area for children (a garage for example), may be counted toward the square feet used for day-care services according to the Tax Court.