Deduct Business Expenses for Use of
Your Home
When determining business expenses that apply to
part of your home, ask yourself the following
questions first:
-
Is this your
Principal Place of Business?
-
Do you meet
or deal with clients here normally?
-
Is this a
separate structure or is it attached to your home?
-
Do you use
it exclusively and regularly for management of
your business?
-
There is no other fixed location where you conduct
your business?
If you use space in your home on a regular basis in
providing child care services, you may be able to
deduct business expenses even though you use the
same space for non-business purposes. To qualify
for this exception; you must have applied for (and
not been rejected), been granted (and still have in
effect), 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. (IRS, p.383)
Time and Space Formula
Determining business percentage
Space
You may do this by measuring the total square foot
of your home and total square foot of the business
area and dividing the total area by the business
area. This will give you the percentage that can be
allocated to business expenses. (It is best to make
a floor plan with the dimensions of each room. Keep
this with your tax records.)
Special Computation for Certain Day-Care Facilities
If part of your home is used as a day-care facility
as well as other areas (partly for business), make
sure you separate the area that is not used
exclusively for day-care. You will need the total
area for the portion and is not used exclusively for
day-care and the total area that is exclusively used
for day-care. This makes a difference when
allocating expenses.
Time
Next, determine the total number of hours your
facility was used for day-care during the year.
Example, your home was used
Monday through Friday for 12 hours per day for 280
days during the year. Your total number of hours
would be 12X280=3,360.
Also, keep track of the time you spend after hours.
Such as:
-
Contacting
parents.
-
Interviewing
potential clients.
-
Setting up
activities for the day.
-
Cleaning up
when the children are gone.
-
Planning
meals/activities, etc.
-
Researching
information.
-
Performing record keeping duties-financially and
files on center and children.
(Note. You cannot double up on the time. In other
words if you are cleaning up while the children are
still there, you cannot claim the time twice. Make
sure you keep track of this information either on a
calendar, or on paper, or on a computerized
database.)
Direct and Indirect Expenses
Tax Deduction. This is the reason you went
through all the work above. Business expenses due
to the use of your home are grouped into these two
categories. Let’s see if I can briefly describe the
difference.
Direct Expenses: They are used only in the
business part of your home. They may be repairs to
a room that is specifically and only used for
business. You may deduct this fully. Some of these
may be, but the list is not limited to this:
-
Automobile
(actual or mileage)
-
Bad Debt
-
Bank Service
Charges
-
Conferences
-
Contributions
-
Dues &
Subscriptions
-
Equipment-may have to be depreciated
-
Freight &
Delivery
-
Furniture-may have to be depreciated
-
Gifts-$25
limit per person per year
-
Insurance-Liability-Workman’s Comp-Part of Health
Insurance
-
License
-
Maintenance
& Repairs
-
Meals-partially or fully
-
Professional-accounting and legal
-
Office
-
Postage
-
Printing
-
Rental fees
-
Supplies
-
Telephone
-
Toys
-
Training
-
Travel
-
Utilities
Again, this is just a generalized list of the
expenses that you may incur in running your
childcare center.
Indirect Expenses: They are used not only
for the business area of the home, but the entire
home. They may be heat, lights, insurance, taxes,
supplies, etc. The indirect expenses must help in
running your business, but they are not used
exclusively for your business. As with anything,
save receipts, cancelled checks and keep records.
(Indirect expenses are allocated based on the total
square foot percentage and time percentage that was
determined as business use of your home.)
All of this information will help you in determining
how much can be deducted on your taxes for business
use of your home. Form 8829 is used to help
determine this when filing your taxes. Also, if you
are interested the IRS has publication 587 to help
determine expenses for business use of your home.
Reference:
Internal Revenue Service. (2000). Package X.
Reference Copies of Federal Tax Forms and
Instructions.
www.irs.gov
