Tax Deductions for Daycare Business: Top 10 Deductions
A daycare center is a recognized business, and can enjoy the same tax deductions as any other company. In addition, if you run a daycare, there are some tax deductions specific to this industry. Here are our top 10 deductions for a daycare business:
1. Employee Wages
Do you have a team of child care providers or do you go at it all alone? If your operation is a bit larger and you have more children to supervise (meaning more staff), than the employee wages you pay do qualify you for a tax break.
As the business owner, you can’t count your own salary, unfortunately.
2. Bank Fees and Interest
Chances are you have a small business bank account to process not just your expenses but the payments from your clients. The monthly bank fees associated with these types of accounts have a tendency to add up. You can include them in your tax deductions.
Did you take a loan to start up the business? Maybe you needed some furniture or had to do some renovations? Then the interest on those loans are also tax deductible.
3. Advertising Charges
How are you promoting your business? Print, social, website, local radio? Did you use an agency? Any advertising expenses associated with attracting new clients to your child care business can be used as a tax deduction.
4. Continuing Education Fees
This is a field where keeping up on the latest child care techniques is vital. If you take a workshop or course, or reimburse a member of your team for doing so, you can deduct those expenses along with transportation charges to and from the school, as well any necessary books required.
The education has to be directly relevant to the business. You can’t hire an unqualified applicant to work at your daycare, then pay for training so that the individual then meets the minimum educational requirements of the position.
5. Membership Dues
This refers to any professional affiliations particular to your industry. Keep those types of receipts, as they do qualify as a tax deduction.
6. Charges for Supplies
These are supplies directly related to the running of the daycare, not equipment and not items for personal use. For instance, diapers, wipes, bottles, formula, cleaning supplies along with any other supplies necessary to carry out your day to day operations can be included.
This also includes office equipment such as postage, paper, ink, etc.
7. Furniture and Equipment Costs
Here’s a tricky one, because equipment or furniture specifically for the daycare can be tax deductible, but may fall under the ‘capital expense’ category depending on how large the purchase is.
Capital costs refers to money spent on an asset that a business invests in to generate revenue, but is one that will also depreciate over a number of years. That depreciation will be accounted for in future tax returns as well. This is unlike regular expenses, which applies full or partial amounts.
Capitalizing an expense helps a company to accurately assess their profits. For instance, if you purchased playground equipment for your daycare at a cost of $15,000, then that can seriously affect your profits for the year, depending on your income and other expenses. To prevent that, the $15,000 charge will be spread out over a number of years.
8. Meal Expenses
Daycare Centers are specifically allowed to deduct meals for their little clients. Under certain conditions a daycare operation can also deduct employee meals, either partially or fully. For full details, check out the IRS webpage on daycare deductions.
9. Insurance Charges
Running a daycare no doubt involves some unique insurance premiums specific to this industry. Many insurance companies now carry ‘daycare insurance’ because the industry is experiencing a boom (Forbes has reported the daycare industry is experiencing tremendous employment growth that will continue through 2020).
You can claim a deduction for insurance costs when filing tax returns.
10. Charges for Utilities
Electricity and water for a daycare are no doubt significant expenses. They too can be deducted.
Tax Deductions for Daycares Run out of Homes
If you operate a daycare out of your home and are licensed by your state, you may be able to deduct partial expenses such as:
- Home space (the amount of the deduction will depend on whether you use this space exclusively for the daycare, for more on this check out the IRS’s breakdown and example)
- Phone line (that is exclusive to your daycare).
- Security system
- Property taxes
- Mortgage interest
Other Questions Related to Tax Deductions for Daycare Business:
What Is a Tax Deduction?
A tax deduction is an expense that is deducted against an individual or a business’s income. Deductions are determined and catalogued by the IRS (Internal Revenue Service).
Deductions can mean significant cost savings for a business. For this reason, it is important to track expenses through receipts. If the expense is part of a tax deduction category as determined by the IRS, and the cost incurred is both “ordinary and necessary” to the business, then the expense can be deducted at tax time.
Small business owners should keep in mind that there are myths around business expenses. Not everything is tax deductible and those items that are may only result in a partial tax break (for instance, a business meal is only 50% deductible). Even then, the qualifying amounts of approved expenses are not fully reimbursed at tax time, instead the amount is deducted from the company’s total taxable income.
How Do I Keep Track of Business Expenses?
One of the most effective ways to track expenses is to categorize and record them shortly after the expense is incurred. This decreases the chances of losing the receipt, or forgetting about the expense, and also keeps the accounting up to date.
An accounting software solution, like FreshBooks, is ideal for that. You can record each expense as you incur it, along with the details, and even attach the receipt digitally. At any time, you can see your expenses totalled under the supplied expense categories.