When you run a licensed day care out of your home, you qualify for an at-home office deduction that can lower your taxable income and thus reduce your overall tax bill. Here is what you need to do to calculate your at-home office deduction.
#1 Figure Out The Square Footage Of Your Home That You Use For Business
The first thing you need to do is figure out what percentage of your home you use for business purposes. Since you run an at-home daycare, you can include rooms that you use for your daycare during business hours and for personal use during none-business hours. This includes all areas of your home that children have access to or you use for daycare purposes, including your kitchen if you prepare food in there and even your garage if you store supplies in it. This also includes rooms the kids are in all the time and even the entry way to your home.
The easiest way to figure this out is to pull out a blueprint of your home and figure out the area for each room of your house that you use for business purposes. Total the square footage for each room you use for your daycare, and then divide that number by the total square footage for your home.
If your kitchen is 200 square feet, your bathroom is 50 square feet, and the living area of your home that you use for the daycare is 450 square feet, you use a total of 700 square feet of your home for business purposes. If the overall area of your home is 1400 square feet, you would divide 700 square feet by 1400 square feet, which would give you .50 or 50%. That means you use 50% of your home for business purposes.
#2 Figure Out How Much Time You Use Your Home For Business Purposes
Second you need to figure out how much time you use your home for business purposes. You are going to want to include all the hours that your business is in operation. You are also going to want to include the time that you have to set up and prepare before you open your daycare each day, as well as the time that you spend cleaning up your home at the end of each business day. Additionally, if you use any area of your home to say, prepare lessons and activities after hours, you need to include those hours.
The easiest way to do this is to take into consideration everything listed above and then figure out how many hours a week you use your home for business purposes. For example, if your daycare is open 60 hours a week, and you estimate that you spend 10 hours a week preparing and cleaning your home for your business, you spend 70 hours a week using your home for business purposes.
Take the number of hours a week you spend for business purposes and multiple it by the number of weeks a year you are open. Continuing the example, if you are open 52 weeks a year, multiple 70 hours by 52 weeks which equals 3,640 hours.
Take the number of hours you use your home for business purposes and divide it by the the number of hours in a year, which is 8,760. So, 3,640 divided by 8,760 gives you 0.415 or 41.5%. This is the percentage of time each year that you use your home for daycare related purposes.
#3 Calculating The Final Deduction Percentage
With the two figures you calculated above, you are ready to figure out what percentage of your home you use for business purposes and thus can deduct from qualifying expenses for your at-home office deduction.
Multiple the percentage of the square-footage of your home that you use for your daycare by the percentage of time each year you use your home for business purposes and then divide that number by 100.
Using the above example, that would be 50% X 41.5% / 00 = 20.75%. That number is the percentage of each qualifying expense that you can now deduce from your taxes as an at-home business expense.
#4 Qualifying Expenses
Now that you have the percentage that you can deduct of qualifying expenses, you need to figure out how much you spent on each qualifying expenses. Qualifying expenses generally include reoccurring expenses such as mortgage, rent, property taxes, gas bill, water bill, electric bill, and the internet. Qualifying expenses also include one-time expenses such as home maintenance.
Using the percentage that you calculated, you can figure out how much of each qualifying expense you can deduct. For example, if you spent $3,000 in electricity, you can deduct 20.75% of that, or $622.50 from your taxes. You will need to figure out how much you spent on each qualifying expense this year, and then times that number by the percentage you calculated above to figure out what you can claim. Once you figure out that number for each expense, add it up and deduct that overall amount from your taxes. Make sure that you can provide detailed documentation for each of these calculations in case you are ever audited.
You can work with a qualified accountant like Dale K. Cline, CPA PLLC on these calculations in order to ensure that you get them correct and that you don't overlook any qualifying expenses that you could deduct through the at-home office deduction that could lower your overall taxable income.
Hello, my name is Mark Thomure and this is a blog that I've written about the various types of money services that are available to individuals and business owners. For convenience and in the event of an emergency, it's important to know all the accessible options. Before these services are needed, it's important to find out about the various fees, requirements and terms. I've learned about the diversity of money services by doing research and speaking with professionals. Since many people don't know about the differences in these services, I thought I would make all the information available in this blog. After reading through the articles on my blog, you'll also be able to make informed decisions about the different categories of money services.