Home Daycare Bookkeeping: Time-Space Percentage and Records

Can I deduct part of my home for a home daycare if my family uses the same rooms?

Yes, if you run the daycare as a business and meet your state's approval condition. Whole-house costs are then deducted at the space percentage times the time percentage; costs of the daycare rooms alone, and food, are handled separately. Other business space must be used only for the business, but home daycare is one of two uses that need not be exclusive: a room your family also uses can qualify if it is used regularly (Publication 587).

Both conditions must be met:

1. The daycare is your trade or business. It cares for children, or for people 65 or older or people who cannot care for themselves. A trade or business is generally carried on to make a profit (Publication 334).
2. The state condition is met. You have applied for (and not been rejected), been granted (and not had revoked), or are exempt from having a license, certification, registration or approval as a daycare center or as a family or group daycare home under state law (26 U.S.C. 280A(c)(4); Form 8829 instructions).

A room used only occasionally for the business does not qualify, and only the part of the year the daycare ran counts. Whether you need a license, and what counts as an exemption, is set by your state. The state condition is a test for the home deduction only; other business expenses such as food, toys and supplies follow the ordinary business-expense rules, and the examiner guide reflects the same view (Publication 5603, examiner guidance, not law).

What makes a case not simple:

• The application was rejected, the license was revoked, or you cannot show why you are exempt.
• The care is a favor to a relative or friend rather than a business.
• You kept no log of hours or meals, or earlier returns used a guessed percentage.
• You plan to sell the house.

Gather: the license, registration or exemption paperwork; a floor plan with the square feet of each room used for the daycare and of the whole home; your open days and hours, attendance sheets and meal log (or a note that none exist); records of parent payments and food program statements; the mortgage interest, property tax, insurance, utility or rent statements; and last year's return.

What is the time-space percentage, and how do I work it out?

The time-space percentage is the space percentage multiplied by the time percentage. Form 8829 calls the result the business percentage and works it out in Part I (Form 8829).

The time rule comes from the statute: hours the space is used for daycare divided by hours it is available for use (26 U.S.C. 280A(c)(4)(C)). Any reasonable way of measuring area works if it gives the right percentage.

Two cases change the arithmetic:

• A room used only for daycare needs no time percentage; its space percentage counts in full. If the home has both kinds of rooms, add the exclusive area's percentage to the shared area's space-times-time percentage and attach the computation (Form 8829 instructions, "Special Computation for Certain Daycare Facilities").
• A daycare that started or stopped mid-year uses 24 hours times the days the home was available, not the full-year figure, and counts only the costs of the part of the year it ran. If you moved, use a separate Form 8829 for each home.

Which hours and which rooms count in the time-space percentage?

Hours. Count the hours the space was used for daycare: days open times hours per day, including Saturdays and long days (Form 8829 instructions, line 4). Hours with no daycare, such as nights and closed days, stay in the 8,760 hours total but not in the hours used.

Preparation and cleaning with no child present. Publication 587 and the Form 8829 instructions do not say whether this time counts. The IRS examiner guide says such hours could be included if they are ordinary and necessary business use on the facts, and recommends a detailed log. It also says it is not an official pronouncement of the law and cannot be relied on (Publication 5603). Whether these hours count depends on the facts, and a log of what was done and when is what supports them.

Rooms. A room available for daycare throughout each business day and regularly used counts as used throughout that day, and you need not log the hours it was used (Publication 587). Publication 587's example is a room the children nap in; the examiner guide adds a bathroom and an eating area (examiner guidance, not law). A room used only occasionally does not count as daycare space. A room the children never enter, such as an office, can still count if you use it regularly and only for the business and it meets the home office rules: see the home office deduction guide. It goes in the exclusive area of the special computation above.

Count every floor in the home's total area. If you use the basement or garage for daycare, include it in both the daycare area and the total; the examiner guide lists leaving it out of the total as a common error.

Which house costs use the percentage, and which are deducted in full?

Costs of running the whole house use the time-space percentage. Costs that are not about the home itself are deducted separately on Schedule C (Publication 587).

• Enter whole bills. Put the full amount of a whole-house cost in column (b) of Form 8829 and let the form apply the percentage. If one bill's daycare share differs from the form's percentage, enter only that share in column (a) and leave column (b) blank for that line (instructions).
• Mortgage interest and real estate taxes use the same percentage. If you itemize, the personal part stays on Schedule A. If you take the standard deduction, the whole business share goes on Form 8829 and is subject to the limit in the last bullet (instructions). The examiner guide names deducting the same amount on both forms as a common error.
• Depreciation, if you own. The building, not the land, is depreciated, times the business percentage. A home first used for business in the tax year is depreciated straight line over 39 years; a home used for business in an earlier year keeps its earlier method. Permanent improvements, including changes made to meet licensing requirements, are depreciated rather than deducted at once; ordinary repairs are not (Publication 587; Publication 5603).
• Limit. Costs allowed only because of the daycare, such as utilities, insurance and depreciation, are capped at the daycare's income after its other expenses and, if you itemize, the business share of mortgage interest and real estate taxes. That itemized share is deductible without the cap, so it can create or add to a loss; with the standard deduction, the business share is capped too. Depreciation is taken last, and the excess carries to the next year you use actual expenses (Publication 587).

Larger purchases such as furniture, a playground set or appliances may need to be depreciated or may qualify for a first-year write-off: see writing off equipment in the first year. For costs you share with your family, such as a phone or car, see splitting mixed-use expenses.

Should I use Form 8829 or the simplified method?

Both methods can be figured before filing. Form 8829 deducts the percentage of actual costs. The simplified method multiplies the area by a fixed rate and skips the actual costs (Publication 587).

Because the simplified method counts at most 300 square feet, a daycare that uses a basement or most of a floor can find Form 8829 larger; the Example shows one case. You choose each year, and switching needs no IRS consent. Using the simplified method on a timely filed original return is the election for that year, and it cannot be undone (Schedule C instructions).

For the income limit, carryovers, depreciation and other businesses in the same home, see the home office deduction guide; every qualifying business shares the simplified method's area cap.

How do I deduct food, and what about food program payments?

Food is not a home cost. Deduct it on Schedule C, separately from Form 8829, and never deduct food eaten by you or your family (Publication 587). Keep helpers' food apart from the children's. For amounts paid after 2025, meals you furnish to employees on your premises for your convenience are generally not deductible, and other business meals are generally deductible at half their cost (26 U.S.C. 274; Publication 15-B). For the children's food, choose one method for the whole tax year:

You may use actual costs one year and the rates another. The rates include drinks but not paper goods or other nonfood supplies, which are deducted separately.

The rates follow the Child and Adult Care Food Program, a federal program that reimburses day care homes through a sponsor. A tax year uses the program's Tier I rates (the higher of its two day care home levels) in effect on December 31 of the year before (Revenue Procedure 2003-22). The rates above are those in the USDA notice for this page's tax year. Alaska, Guam, Hawaii, Puerto Rico and the U.S. Virgin Islands have higher rates. Publication 587 prints one year's table; the edition for this page's tax year is not out yet, so check these rates against it when it is. For an earlier year, use the table in that year's Publication 587.

Eligible children are minors receiving daycare in your home. They do not include children who live there, children whose parents live there, or children you care for as a personal favor, such as a relative's (Publication 587).

Food program payments. Reimbursements from a sponsor under the Child and Adult Care Food Program are taxable only to the extent they exceed your food costs for eligible children. Show an excess as income in Part I of Schedule C and a shortfall as an expense in Part V, even if you receive a Form 1099-MISC. Leave out payments and costs for your own children. If you use the standard rates, deduct only the part of a rate that is more than the reimbursement for that meal (Publication 587; Schedule C instructions).

How do I set up the books and records for a home daycare?

The books must show gross income, deductions and credits, and a supporting document should back each entry (Publication 583). No particular system is required. A daycare also needs records of hours, attendance, meals and home costs.

Publication 587 says you need not log the hours of a room that is available all day and regularly used. The examiner guide still says to record how you computed the total hours, so keep the open days and hours and the attendance sheets.

Keep the money apart. Parent payments and food program payments are easiest to show as income when they go into an account used only for the daycare. See a separate business bank account and, if payments already landed in a personal account, business income in a personal account.

For the accounts, see a chart of accounts for Schedule C. For the rest, see record keeping for the self-employed, how long to keep records and lost receipts.

Do I have to give parents my Social Security number, and how are their payments reported?

Parents who ask for your taxpayer ID need it to claim the child and dependent care credit or employer dependent care benefits. Form W-10 names a Social Security number for a sole proprietor, or an ITIN if the provider has none and is not eligible for one; an EIN is the number for other entities. Section 6109(a) requires a provider to give a correct number, and a provider who does not may owe a penalty for each failure unless it is due to reasonable cause and not willful neglect. A parent can also show due diligence with a printed invoice that shows your name, address and number (Form W-10).

Parent payments are business income on Schedule C, however they arrive. Under the cash method, report what you received in the year, in cash, by check or through an app, with or without a form. A Form 1099-K may not equal the income to report (Publication 334). If your net earnings from self-employment are $400 or more, you pay self-employment tax: 12.4% Social Security (up to an annual earnings limit) plus 2.9% Medicare, on 92.35% of your net profit. No tax is withheld from parent payments, so see quarterly estimated tax payments.

Helpers are employees or contractors depending on the facts: see contractors who may be employees. To pay your own child, see hiring your children.

What happens to the daycare deduction when I sell the house?

Rooms used for daycare inside the home do not split the sale into a personal and a business part, and the business part is not sold separately on Form 4797. The gain up to the depreciation allowed or allowable after May 6, 1997 cannot be excluded (Publication 523; Publication 587).

• The depreciation part is taxed at up to 25%, a separate rate the IRS calls unrecaptured section 1250 gain (Topic 409).
• The rest of the gain can be excluded, up to $250,000 ($500,000 for certain joint filers), if the ownership and use tests are met: see the home-sale exclusion.
• Depreciation you did not claim still counts for basis. The home's basis falls by the depreciation you could have taken. The gain you cannot exclude is the depreciation allowed or allowable after the cutoff; if adequate records show you deducted less than you were allowed, it is the amount you actually deducted (26 U.S.C. 1250(b)(3); Publication 587). Check your records before you report the sale.
• Simplified-method years carry no depreciation.
• A separate structure used for daycare, such as a detached studio or garage, is treated differently. It can be sold as a separate property reported on Form 4797, and its gain may not qualify for the exclusion.

Example

These examples are illustrative. All amounts are in US dollars.

Working out the percentage

A provider uses a basement for daycare 12 hours a day, 5 days a week, 50 weeks a year. The family uses it the rest of the time. The basement is half the home's total area.

• Hours used: 12 × 5 × 50 = 3,000.
• Time percentage: 3,000 ÷ 8,760 = 34.25%.
• Space percentage: 50%.
• Time-space percentage for whole-house costs: 50% × 34.25% = 17.12%.

A US$800 repainting of the basement alone uses only the time percentage: 34.25% × US$800 = about US$274.

Form 8829 or the simplified method

The basement is 1,600 square feet in a 3,200-square-foot home (50%). The home's mortgage interest is US$8,000 and its utilities and insurance are US$4,000.

• Form 8829: 17.12% × US$12,000 = about US$2,054 on Schedule C, before the deduction limit and ignoring depreciation. The other US$6,630 of interest stays on Schedule A if the provider itemizes.
• Simplified: the basement counts at the 300 square foot cap, 300 × US$5 = US$1,500, reduced to 34.25% of that, about US$514 on Schedule C. All US$8,000 of interest stays on Schedule A if the provider itemizes.

Form 8829 moves more cost to Schedule C here, but the two are not like for like: comparing them takes the whole return, and Form 8829 needs the bills, the area and the hours.

Food with the standard rates

A provider serves 3 children lunch and 2 snacks for 250 days and logs each child's name, attendance and meals. At the standard rates (US$3.22 per lunch and US$0.96 per snack), each child-day is US$3.22 + 2 × US$0.96 = US$5.14. With 3 × 250 = 750 child-days, the deduction is about US$3,855. The log supports this instead of every grocery receipt. If a food program reimbursed those meals, only the part of the rates above the reimbursement is deductible.

Different for you?

• You started this year: the percentage uses only the days the home was available for daycare, and a log begun now supports it. Start the daily log above today. A first-year return is where individual tax help fits for the part-year hours and the area.
• You have no log of hours or meals, or past returns used an estimate: the percentage has to rest on records you can show. Rebuilding hours from calendars, attendance sheets and deposits, and working out which percentage is supportable, is where individual tax help fits.
• Past returns used a guessed percentage, counted rooms with no qualifying business use, or left the deduction off: see amending a return for business expense mistakes, and individual tax help fits for what to correct and how food costs and reimbursements were reported. If returns were never filed, see Schedule C expenses for unfiled years. If the IRS has written or opened an audit, see an IRS audit of a small business.
• You plan to sell the home: depreciation after May 6, 1997 and any separate structure change the gain. See the home-sale exclusion, and individual tax help fits before you list.
• Your license was rejected, revoked or lapsed, you are unlicensed, or you are unsure you are exempt: the state condition decides whether shared rooms qualify for the home deduction. It does not change that parent payments are income, or the rules for deducting food, toys and supplies. Individual tax help fits before you claim the home deduction.
• Your spouse co-owns the daycare, or it runs through a corporation or partnership: a business that spouses own and run together is generally a partnership, not a Schedule C, unless a qualified joint venture election or the community property exception applies (Publication 334). Form 8829 is filed only with Schedule C. See spouse and family LLCs, and individual tax help or corporate tax help.
• Books are behind, or home bills run through personal accounts: see catching up on overdue books and bookkeeping help.