Deducting your expenses as a home-based childcare provider can save you a lot of money at tax time. Unfortunately, more than 70% of providers are missing out on deductions and savings, according to this article.
The reason is many home daycares don’t calculate their Time-Space Percentage accurately. Your Time-Space Percentage (T/S%) is the single most important number to accurately calculate for your tax return, as our now-retired friend and business expert Tom Copeland puts it.
Your T/S% represents the proportion of your home that is used for business purposes. And it is the key to unlocking how much of your shared business and personal expenses can be deducted on your tax return, such as home and land improvements, depreciation, mortgage interest, utilities, rent, cleaning supplies, toys, and much more.
Thanks to Tom, we were able to draw insights from his wildly popular blog to bring you this guide. So let’s dive in!
Three Steps to Finding Your Time-Space Percentage
Just looking at the name, you know it has something to do with your Time and your Space. It does. When you multiply your Time Percent and your Space Percent, you get your T/S%.
Here’s the formula:
Exclusive Space Percent + (Regular Use Area Space Percent X Time Percent) = Time/Space Percent
As you can see, before you can figure out your T/S%, you need to determine your Time and Space percentages. Once you have those, your T/S% is a piece of cake.
Exclusive Space Percent
Do you have a room or space in your home that is used exclusively for your daycare? If not, use ‘0’ in the equation. You can also skip to Step 1 – Determine Your Time Percent.
If you do have a room or any space in your house that is used exclusively for your home daycare and never, not even once, used by you or your family for personal reasons, you can take advantage of the exclusive use room rule to increase your T/S%.
Step 1 – Determine Your Time Percent
Your Time Percent represents the percentage of hours you work in a year.
Tips:
Be sure to include ALL the hours you worked in your home, even the time you spent on your business after the kiddoes have left, like cleaning, cooking and prepping meals, recordkeeping, business development, online training, parent interviews, creating a grocery list, unloading your car, preparing taxes, etc. Basically, any time you spend on an activity you do at home for your daycare business should be included to calculate your Time Percent.
Keep a daily record of the time the first child arrives and when the last one leaves. Those extra minutes outside your normal operating hours can add up quickly over a year.
Step 2 – Determine Your Regular Use Space Percent
Your Regular Use Space Percent represents the number of square feet in your home used on a regular basis for business.
Tips:
On a regular basis means that you use the space/room two or three times a week for business. Living rooms, dining rooms, kitchens, bathrooms, entryways, playrooms, and pantries are all commonly used on a regular basis for a home-based childcare business. Children don’t have to be in the room for the room to be considered as regular use.
The total number of square feet of your home MUST include basements and garages. These spaces can also be counted in your total square feet used for your business, if you regularly use them for things like business storage, doing laundry for your business, housing a vehicle you use for your business, a furnace that heats your business, etc.
To quote Mr. Copeland, “Most providers count all the rooms in their home as regular use and therefore their Space Percent would be 100%. Don’t be afraid to claim a 100% Space Percent!”
Step 3 – Calculate Your T/S%
This is the easy part. Take your Time Percent and multiply it by your Space Percent. If you had Exclusive Space Percent, add it to the result like this:
Tips:
Most home-based childcare providers who work full-time, year round, will probably have a T/S% between 30-45%.
Because things can change from year to year, you should always recalculate your T/S% every tax season.
If you have a space that is exclusively used by your home-based daycare, count it in Exclusive Space Percent. DO NOT include it in your Regular Use Space. A room/space is either shared or exclusively used. It can’t be both.
Always Track Your Home Expenses
While your T/S% is the most important calculation for your taxes, having an accurate and complete record of your home expenses comes in a close second. Not only will it help you maximize your tax deductions, it will also help you budget for the future.
A convenient way to keep track of your expenses is to use software designed especially for home childcare businesses. With Parachute, for example, you can track all your expenses, calculate your T/S%, manage invoices and income, and offer families a way to pay online automatically with credit cards. To learn more and start a free, 30- day trial, click here.
Tips
Whether using an electronic system or not, record and file your expenses/receipts by the various IRS categories for expenses in Part II of the Schedule C, such as Meals, Wages for Employees, Supplies, Utilities, etc. It makes tax time much easier.
Retain all your receipt records, both hard copy and electronic. As they’re considered “source documents” you may be asked to provide during an audit by the IRS, CACFP, or other federal entity operating a subsidy program in which you participate. Be sure to know the length of time each entity requires you to keep source documents. Time can vary.
Both software and software training qualify as a tax-deductible expense, so don’t let cost or concerns about learning software stop you from modernizing your home childcare business.
