Day-Care Facility

If you use space in your home on a regular basis for providing day care, you may be able to deduct the business expenses for that part of your home even though you use the same space for nonbusiness purposes. To qualify for this exception to the exclusive use rule, you must meet the following requirements.

1. You must be in the trade or business of providing day care for children, persons 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. You do not meet this requirement if your application was rejected or your license or other authorization was revoked.

Figuring the deduction. If you regularly use part of your home for day care, figure what part is used for day care, as explained earlier under Business Percentage. If you use that part exclusively for day care, deduct all the allocable expenses, subject to the deduction limit, as explained earlier.

If the use of part of your home as a day-care facility is regular, but not exclusive, you must figure what part of available time you actually use it for business. A room that is available for use throughout each business day and that you regularly use in your business is considered to be used for day care throughout each business day. You do not have to keep records to show the specific hours the area was used for business. You may use the area occasionally for personal reasons. However, a room you use only occasionally for business does not qualify for the deduction.

To find what part of the available time you actually use your home for business, compare the total time used for business to the total time that part of your home can be used for all purposes. You can compare the hours of business use in a week with the number of hours in a week (168). Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2001).

Example 1. Mary Lake uses her basement to operate a day-care business for children. She figures the business percentage of the basement as follows.

She uses the basement for day care an average of 12 hours a day, 5 days a week, for 50 weeks a year. During the other 12 hours a day, the family can use the basement. She figures the percentage of time the basement is available for use as follows.

Mary can deduct 34.25% of any direct expenses for the basement. However, because her indirect expenses are for the entire house she can deduct only 17.13% of the indirect expenses. She figures the percentage for her indirect expenses as follows.

Mary completes Form 8829 as shown in Figure B. In Part I she figures the percentage of her home used for business, including the percentage of time the basement is used.

In Part II, Mary figures her deductible expenses. She uses the following information to complete Part II.

Mary enters her tentative profit, $25,000, on line 8. (This figure is the same as the amount on line 29 of her Schedule C.)

The expenses she paid for rent and utilities relate to her entire home. Therefore, she enters them in column (b) on the appropriate lines. She adds these two expenses ( line 21) and multiplies the total by the percentage on line 7 and enters the result, $1,585, on line 22.

Mary paid $500 to have the basement painted. The painting is a direct expense. However, because she does not use the basement exclusively for day care, she must multiply $500 by the percentage of time the basement is used for day care (34.25% -- line 6). She enters $171 (34.25% × $500) on line 18, column (a). She adds lines 21 and 22 and enters $1,756 ($171 + $1,585) on line 24. Because this is less than her deduction limit ( line 15), she can deduct the entire amount. She completes the rest of Part II by entering $1,756 on lines 32 and 34. She then carries the $1,756 to line 30 of her Schedule C (not shown).

Figure B—Part I of Form 8829

Example 2. Assume the same facts as in Example 1 except that Mary also has another room that is available each business day for children to take naps in. Although she did not keep a record of the number of hours the room was actually used for naps, it was used for part of each business day. Since the room was available during regular operating hours each business day and was used regularly in the business, it is considered to be used for day care throughout each business day. The basement and room are 60% of the total area of her home. In figuring her expenses, 34.25% of any direct expenses for the basement and room are deductible. In addition, 20.55% (34.25% × 60%) of her indirect expenses are deductible.

Meals. If you provide food for your day-care recipients, do not include the expense as a cost of using your home for business. Claim it as a separate deduction on your Schedule C (Form 1040). You can never deduct the cost of food consumed by you or your family. You can deduct as a business expense 100% of the cost of food consumed by your day-care recipients and generally only 50% of the cost of food consumed by your employees. However, you can deduct 100% of the cost of food consumed by your employees if its value can be excluded from their wages as a de minimis fringe benefit. For more information on meals which meet these requirements, see Meals in Publication 15-B, Employer's Tax Guide to Fringe Benefits.

If you deduct the cost of food for your day-care business, keep a separate record (with receipts) of your family's food costs.

Reimbursements you receive from a sponsor under the Child and Adult Food Care Program of the Department of Agriculture are taxable only to the extent they exceed your expenses for food for eligible children. If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C. If your food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C. Do not include payments or expenses for your own children if they are eligible for the program. Follow this procedure even if you receive a Form 1099 reporting a payment from the sponsor.

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