1. Special Rules for In-Home Daycare Providers Date
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3. Who is a daycare provider?
To qualify for the deduction, you must use your home to provide daycare services on a regular basis and meet both of the following conditions:
Be in the trade or business of providing daycare
Be licensed, certified, registered, or approved as a daycare provider with the state in which the business is operated.
Who is a daycare provider:
Those that provide daycare services in their homes are allowed to deduct some of the expenses under the business use of home rules.
To qualify for the deduction, you must use your home to provide daycare services on a regular basis and meet both of the following conditions:
Be in the trade or business of providing daycare to children, those age 65 or older, or those with physical or mental disabilities that render them unable to care for themselves.
Be licensed, certified, registered or approved as a daycare provider with the state in which the business is operated. Those that have applied but have not yet received approvals can also deduct expenses, provided they do not receive a revocation. Those exempt from having a license, certification, registration or approval may also deduct expenses.
If your application is rejected or your license or other authorization was revoked, you may not deduct expenses.

4. Business use of home – daycare exception
General Rule: Only deduct expenses for space that is regularly and exclusively used for business
Daycare Provider Exception: Deduct expenses for space used regularly to run daycare even though space may also be used for non-business purposes
allows deduction when space is used by family during non-business hours
How to figure business use of home percentage:
Generally, a taxpayer may only deduct business use of home expenses for space in the home that is used regularly and exclusively for business purposes. However, there is an exception to the exclusive use test for daycare providers.
A taxpayer who uses space in his or her home on a regular basis for providing daycare may be able to deduct the business expenses for that part of the home even though it is also used for nonbusiness purposes. Regular but not exclusive use applies when rooms of the house used for daycare on a regular basis are also used by the taxpayer's family during other hours.

5. Business use of home – regular & exclusive use
Part of the home exclusively for daycare, a percentage of allocable expenses are deducted using the following formula:
Square footage of the portion used exclusively for daycare Total square footage of the home
If the taxpayer uses a part of the home exclusively for daycare, a percentage of allocable expenses (such as homeowner's insurance, mortgage interest, etc.) are deducted using the following formula:
Square footage of the portion used exclusively for daycare Total square footage of the home

6. Business use of home – regular but non-exclusive use
- Part of the home as a daycare facility is regular, but not exclusive, the following percentage calculation is also used in deducting allocable expenses
Number of hours available for daycare use Total number of hours in the year
 - The hours of use percentage, determined above, is then multiplied by the square footage percentage for the percentage to use for "indirect expenses."
If the use of part of the home as a daycare facility is regular, but not exclusive, the following percentage calculation is additionally used in deducting allocable expenses:
Number of hours available for daycare use Total number of hours in the year

7. Business use of home – example
- Jamie used her basement to operate her daycare business.
Her basement is 2,000 square feet.
The square footage of her entire home is 4,500.
Jamie’s daycare is open 5 days a week for an average of 12 hours each day for 50 weeks a year.
During the times the daycare is not open, Jamie’s family uses the basement.
Example: Jamie used her basement to operate her daycare business. Her basement is 2,000 square feet. The square footage of her entire home is 4,500. Jamie therefore uses 44% of her home to operate the daycare figured by dividing the square footage of the basement by the square footage of the entire home.
Square footage of home used for daycare = basement = 2,000
Total square footage of home = 4,500
Jamie’s daycare is open 5 days a week for an average of 12 hours each day for 50 weeks a year. During the times the daycare is not open, Jamie’s family could use the basement. The amount of time the basement is used for daycare is 34.25% computed as follows:
# of hours available for daycare (12 hrs× 5 days per week x 50 weeks) = 3,000 Total number of hours in the year (24 hrs per day × 365 days per year) = 8,760
Note: In leap years, you will change the denominator in the calculation above to reflect that by replacing 365 days/year with 366 day/year, which will increase the total number of hours to 8,784
Based on the computations above, Jamie will be able to deduct 34.25% of all direct expenses incurred for use of the basement, but only 15.07% of any indirect expenses (expenses for the entire house). To determine the deductible portion of indirect expenses you must multiply the business use percentage of the basement by the percentage of time the basement is used for daycare.
Business % of the basement × % of the time used for daycare = (44% × 34.25%) = 15.07%
An example of a direct expense would be painting the basement. An example of an indirect expense would be the cost of mortgage insurance.

8. Business use of home – example cont.
- Jamie uses 44% of her home to operate the daycare, figured as follows:
2,000 square footage of the basement
4,500 total square footage of the home
- The amount of time the basement is used for daycare is 34.25% computed as follows:
# of hours available for daycare (12 hrs 5 days/week 50 weeks) = 3,000 Total number of hours in the year (24 hrs/day 365 days/year) = 8,760

9. Business use of home – example contd.
- Based on the computations on the prior slide:
Jamie will be able to deduct 34.25% of all direct expenses incurred for use of the basement.
But, only 15.07% of any indirect expenses (expenses for the entire house).
To determine the deductible portion of indirect expenses you must multiply the business use percentage of the basement by the percentage of time the basement is used for daycare.
In this case 44% %.
An example of a direct expense would be painting the basement. An example of an indirect expense would be the cost of mortgage insurance.

10. Snack and meal expenses
- May use the standard meal and snack rates, instead of actual costs, to compute the deductible cost of meals and snacks provided to eligible children
- The standard rate is only available for children in the provider's care who:
are minors under parental control and not self-supporting,
are not full- or part-time residents of the home, and
whose care is not provided solely for personal reasons.
Snack and meal expenses:
A taxpayer who qualifies as a family daycare provider may use the standard meal and snack rates, instead of actual costs, to compute the deductible cost of meals and snacks provided to eligible children. Qualifying family daycare is defined as care provided to eligible children in the home that is non-medical, does not involve a legal transfer of custody, and is generally less than 24 hours. Qualifying family daycare providers may use the rate whether or not licensed, registered, or otherwise regulated by the state or locality in which the care is provided.
The standard meal and snack rates do not include other non-food items used for food preparation, service, or storage, such as containers, paper products, or utensils. A family daycare provider who uses the standard meal and snack rates may separately deduct the cost of these non-food items on Schedule C.

11. Snack and meal expenses, cont.
- The standard rate is allowed for up to one breakfast, one lunch, one dinner, and three snacks per day, per eligible child, provided the meals and snacks are actually purchased and served.
The snack/meal rates for 2016  are:
Note: For family daycare providers who receive reimbursements from a sponsor under the Child and Adult Care Food Program (CACFP) of the Department of Agriculture, only the portion of the cost of food, if any, that exceeds the reimbursement is deductible.
Breakfast
Lunch or Supper
Snack
Continental US
$1.31
$2.46
$0.73
Alaska
$2.09
$3.99
$1.19
Hawaii
$1.53
$2.88
$0.86

12. Snack and meal expenses, cont.
- To use the standard rate, must maintain records to substantiate computation of the total amount deductible. The records must include:
the name of each eligible child,
dates and hours of attendance in the family daycare, and
the type and quantity of meals and snacks served.
- The election is made by claiming the standard meal and snack rate on the return, Schedule C, Form 1040.
If the election is made, the standard rate must be used for all food expenses.
The election is binding only for the current year.

13. Recordkeeping
- Should follow standard business recordkeeping practices with following exceptions
Do not have to keep explicit records for hours that each room of the home is used for business purposes
However, the daycare provider should keep records indicating the days that they were open during the year and the general hours of operation
- Keep records of all other expenses incurred in connection with the business such as receipts, invoices, canceled checks, credit card, and bank statements

14. Why risk a mistake on your taxes?
Why seek a tax expert…
Between 2001 and 2013, IRS compliance activity increased significantly:
Face-to-face audits by 66%.
Mail audits by 103%.
Unpaid balance investigations by 79%.
Automated underreporter investigations by 272%.
Lien filing and levies issues by 127%.
Taxpayers' appeals cases by 81%.
Accordingly, from 2001 to 2014, the IRS increased the number of notices it sent annually by 570%.
Why risk a mistake on your taxes?

15. Taxes are complicated…
Taxes are complicated and the tax code even more so! Ask yourself:
Are you keeping up with the latest tax law changes?
Are you applying new tax laws correctly and to your advantage?
Are you sure you are getting the most refund possible?
If the IRS calls are you prepared to answer?
If you answered NO to any of these questions,
schedule an appointment TODAY with a tax expert at H&R Block.

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