Best Tax Breaks for Child Care Business Owners

Get the most for your tax dollars and keep more of what you make with this handy, updated guide If you're a small business owner, taxes may be your biggest headache.

It does not matter if you have a dedicated daycare center in operation or are simply running your own at home — everything from snacks to insurance cost money. Much of those costs can be written off when it comes time to prepare your taxes, reducing your taxable income and allowing you to reinvest the funds in quality care. This guide outlines the most typical and meaningful daycare tax deductions, sensible apportionment techniques, and a recordkeeping strategy to substantiate each deduction.

Direct operating expenses

• Supplies and classroom materials: Consumable supplies including diapers, art supplies, cleaning items, paper goods, learning materials and educational toys often are deductible. Keep all receipts and record the date and purpose of each purchase.
• Food and snacks: If you serve meals and snacks to children as part of your service, those costs are deductible. Hold on to menus, receipts and notes about what meals were offered or provided to substantiate business use.
• Cleaning and sanitation: L’s costs for laundry, disinfectants, deep cleaning service provider fees, and specialized sanitization services are deductible by the business because they help to keep a safe workplace.

Facility and occupancy costs

• Rent or mortgage allocation: If your daycare is in rented space, you can take a deduction toward the rent of the business area. Home-based daycares can assign a reasonable portion of your mortgage interest or rent and other home costs to the business based on square footage or time-of-use.
• Utilities and web: Utility and internet (business-use portion) charges such as electricity, water, heating, business-use internet can be split between personal and business uses. Apply a monthly bill and well-defined allocation mechanism.
• Insurance: Liability insurance, property insurance on the facility and special policies pertaining to childcare activities are business expenses.

Staffing and payroll-related deductions

Wages and payroll taxes: Salaries for assistants, teachers or aides, as well as employer-paid payroll taxes can be deducted. Keep records of payroll, time sheets and workers’ classification.

Employee benefits and training: Contributions to employee benefit plans, worker training, first-aid certification costs and continuing education for staff are deductible if they relate to the business.

Equipment, furnishings and depreciation

Small equipment and durable goods: Frequently used items, such as cribs, high chairs, furniture, computers and playground equipment are business assets. Depending on their cost and useful life, you can deduct them up front or spread the costs out over time through depreciation.

Repairs and maintenance:  Routine repairs and maintenance that are necessary in keeping your equipment/property/facility running can be deducted. Keep invoices and notes separating repairs from capital improvements.

Vehicle and travel expenses

Business mileage and vehicle expenses: Travel to buy supplies or take children on field trips or for business-related events may be eligible. You have options here, you can go with the standard mileage method or actual expense method and simply maintain a record of your miles driven including date, purpose, and number of miles.

Training travel: If you or employees travel for the purpose of business education or conferences that are related to childcare operations, those expenses — for transportation, lodging and meals — may be deductible if they’re ordinary and necessary.

Administrative and professional services

• Licensing, fees and permits: These include the cost of acquiring or renewing operating licenses, background checks mandated by regulators and other compulsory permit fees.
• Professional services: Fees paid to accountants, business consultants, legal advice and payroll services that run the daycare are all legitimate business expenses.
• Advertising and marketing: You can deduct costs for online listings, flyers, signs and other marketing materials to help bring in families.

Health and safety improvements

Safety upgrades: Glass safety gates, locks, smoke detectors and fire extinguishers as well as child-safe latches that protect toddlers and are up to code can be deducted.

Health supplies and protocols: Costs associated with having a healthy environment, like sanitizing stations, masks during an outbreak or specific cleaning equipment, can be eligible deductions as necessary business expenses.

Home office and mixed-use spaces

Home daycare allocation: For those who operate from their homes, find a fair way to allocate costs — like percentage of square footage used for the daycare only, or percentage of hours in which space was used for business. Only the amount attributable to the trade or business is deductible.

Exclusive use vs. shared spaces: Home-related deductible expenses often cannot be taken unless a specific area is used exclusively and regularly in the business. Common Ground could be divided based on something reasonable like hours of use.

Recordkeeping best practices

– Make sure to save orderly receipts and invoices: Save all of your receipts, whether they are digital or paper, and write the business purpose on them. Regularly back up digital copies.

— Keep a mileage and expense log: Record travel, clients' activities and business-related trips with dates, destinations, purposes.

— Keep business and personal finances separate: Open specific bank and credit card accounts for the daycare to ensure there’s a clear transaction trail.

—Document distribution methods: Whether you distribute rent, utilities or expenses related to the household, articulate your method and use it consistently.

Year-round tax planning tips

Review expenses four times a year: Perform regular examinations of where you’ve been spending, and identify what is considered deductible expenditure throughout the year to manage budgeting in the most efficient way, maximizing cash flow.

Estimate taxes and save for payments: If you are a self-employed provider, squirrel away money for your estimated tax payments so that nothing catches you by surprise.

Seek professional advice for more complicated matters: For big expenditures and capex investments, staffing decisions or shifts in business entity discuss with a pro about how it impacts what you want to achieve long term.

Final thoughts

Daycare provider owners have numerous ongoing and one-time expenses that, if appropriately accounted for, can lower taxable income and improve the financial wellbeing of their business. Focus on planning, interconnection and organizing records, uniform allocation and timely preparation. When you know what costs are deductible — and keep good records — you can confidently deduct legitimate business expenses while concentrating on high-quality care.