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Tuesday, March 11, 2008

10 Tax Deductions Home Daycare Providers Miss

Most child care providers know they can deduct the cost of food and supplies for their business on their taxes. Some even know they can take a substantial mileage deduction. But many home daycare providers miss some large deductions that can really help trim your tax bill or increase your refund. This article deals with ten commonly missed deductions and how to apply them to your taxes.
I am sure you have diligently kept your receipts from last year and have added up your food costs. Did you also calculate the cost of your consumable supplies? Maybe not! Consumable supplies are the items used for your business that are, well, consumed and have to be purchased over and over again. Items like toilet paper, tissues, napkins, paper towels, dish soap, laundry soap, etc. fall into this category. All of these items are either used by the children in your care or are used more frequently because you have children in your care. And all of them are partially deductible on your taxes. If you buy these supplies strictly for child care and your family doesn’t use them, then these supplies are 100% deductible. However, most of us don’t separate out our toilet paper for daycare and family use. So, in order to find out how much you can deduct for these consumables, you need to apply the time/space formula to the total amount spent on these supplies in a year. The time/space formula calculates how much time you spent doing daycare in a year compared to the number of hours in a year, and also calculates the amount of space in your home that you use for your business. For a full description of the time/space formula, see my article “Important Tax Deductions for Home Daycare and Child Care Providers” on Briefly, you need to calculate the number of hours you spent doing child care in a year. Then you need to divide that number by the number of actual hours in a year (8760) to come up with a percentage of time you spent providing child care in the year. Finally, you need to calculate the percentage of your home that you use for your business and multiply this percentage times the percentage of hours worked to get a final percentage. This final percentage is then multiplied by the amount spent on consumables in a year to come up with the dollar figure of how much you can claim as a business expense on the consumables you purchased. Here is a list of the most common consumables used, though you may come up with a lot of others depending on your situation: dish soap, laundry detergent, dryer sheets, all cleaning products, Ziploc bags, aluminum foil, Saran wrap, garbage bags, tissues, toilet paper, paper towels, baby wipes, hand soap, lotion, paper plates, paper cups, and air fresheners. There are many others that may apply to your home. Try to come up with an exhaustive list that applies to your situation.
This next grouping of deductions I will deal with together, as they are all related. These deductions deal with supplies and services for your home that you pay for. This includes utilities, garbage services, internet service, and more. Since these services benefit both your business and your family, they once again need to have the time/space formula applied to them in order to calculate your deduction. Use the figure that you calculated from above and multiply it times the total amount paid in a year for, say, your electric bills to come up with a deductible amount. Basically, any supply or service that is used to benefit your business can be at least partially deducted. Remember to include these items: electric bills, propane or natural gas, water bills, home security system fees, cable or satellite television, internet service (if you use the internet for your business for advertising or looking things up or email), and garbage and/or recycling pickup. All of these services are necessary for running a child care business and are therefore deductible. Just calculate the total amount spent in a year for a service and then multiply it by your time/space formula calculation to get a total deduction. List these out and give them to your accountant, it’s that easy!
There are occasionally times when you can deduct 100% of the cost of a service. This applies when a service is used exclusively for your business. For example, if you have a phone line that is only used for your child care business, then you can deduct 100% of the fees for that phone line. Also, if your child care is run out of a separate building from your home, say a converted garage, then you can probably figure out the electricity for just that building and deduct that cost at 100%. It is, of course, advantageous to be able to increase your deductions, so take advantage of this if you can.
The tenth and final deduction that is commonly missed is a deduction for work done on or services provided for your home. For example, did you have new gutters installed? That cost will be at least partially deductible. Did you have your carpets cleaned? Again, that is a deduction. Did you have a repairman come to fix the refrigerator? Take a deduction for that! Save all receipts for any work done so you can claim the deduction. You will need to speak with your accountant about how much you can deduct for services done, because it depends on the service how the deduction is taken. Things like refrigerator repair will probably be deducted based on the time/space formula. Carpet cleaning and other cleaning services may be 100% deductible. Things like home improvements may have the time/space formula applied or they may be depreciated, depending on the cost. These can be great deductions, it is just a little more difficult to know how to calculate the total deduction on these items and should probably be done with the help of an accountant.
These ten tax deductions are fairly simple to apply and can really bring a home daycare provider some much needed tax relief. It takes a little extra time to calculate these items, but it can definitely be worth it in the long run!
If you are doing your own taxes, or even if you are having an accountant do them for you, it is important to know which deductions you can take. For even more information on tax deductions for home-based businesses, check out this fantasic guide - it is well worth the money! Click Here!

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