Home Daycare Taxes: Deductions to Claim

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Running a home daycare comes with many responsibilities, from caring for children and planning activities to cleaning and knowing what deductions to claim on your home daycare taxes.

One of the most important and often overlooked aspects of operating a home daycare is managing axes. Understanding what deductions you can claim as a home daycare provider can save you hundreds, even thousands, of dollars every year. Let’s dive into the key deductions available to help you get the most out of your tax return.

After 30 years of running my own home daycare and doing my own taxes that whole time, I have learned a lot about what you can deduct. Make sure to pinch every penny because if you don’t deduct a deductible item, you are paying taxes you shouldn’t be.

Why Tax Deductions Matter for Home Daycare Providers

When you run a daycare from your home, you’re considered self-employed. This means you’re responsible for paying self-employment taxes as well as income tax on your earnings. Fortunately, the IRS allows you to deduct a wide variety of expenses that are considered “ordinary and necessary” for your business. These deductions reduce your taxable income, lowering the amount you owe the IRS.

Keeping accurate records throughout the year, including receipts, mileage logs, bills, and time-use records, is essential to support these deductions in case of an audit. Let’s look at the most common and valuable deductions you can claim.

Time-Space Percentage: The Cornerstone Deduction

One of the most important concepts in home daycare taxes is the Time-Space Percentage. This formula allows you to deduct a portion of shared household expenses, like rent, utilities, and insurance, that are used both for personal and daycare purposes.

Here’s how it works:

• Time Portion: This is the percentage of hours your daycare operates compared to the total hours in the year.
• Space Portion: This is the percentage of your home that is used for daycare, either exclusively or regularly.

For tons of expert tax advice, check out Taking Care of Business here.

Multiply the Time Percentage by the Space Percentage to get your Time-Space Percentage. Then apply this percentage to shared expenses.

For example, if you use 30% of your home regularly for daycare, and you operate 12 hours a day, 5 days a week, that’s about 35.7% of the year (calculated by dividing your daycare hours by the total hours in the year). Your Time-Space Percentage would be 30% x 35.7% = 10.71%. You can deduct 10.71% of your utilities, rent, home insurance, and similar costs.

Don’t worry about this right now, just keep in mind that you will be able to take this deduction. So save your rent and utility invoices for tax time. If you can’t figure out the percentage, a tax professional can help you. But it’s a big deduction, so be ready.

It also comes in handy when you have a shared expense, such as toilet paper or laundry soap. Your family uses and and the business uses it, so if you don’t want to keep separate containers and you don’t want to make a log of usage to track it for a few months, you can use the Time-Space Percentage and deduct that much of the expense.

Home Expenses You Can Deduct Using the Time-Space Percentage

Once you calculate your Time-Space Percentage, you can apply it to the following expenses:

• Rent or Mortgage Interest: If you rent, you can deduct the percentage of your rent that applies. If you own your home, you can deduct a portion of your mortgage interest (but not principal) and property taxes.
• Utilities: Gas, electric, water, trash, and internet services used in your home.
• Homeowner’s or Renter’s Insurance: Only the portion that applies to your home, not auto or life insurance.
• Depreciation: If you own your home, you may depreciate its value (not including the land) over time. This can result in significant savings, though it may affect your taxes when you sell the home.
• Repairs and Maintenance: General upkeep, like painting, plumbing, or fixing appliances, may be partially deductible.
• Security Systems: Any security systems or monitoring services used in your daycare.

Direct Daycare Expenses: 100% Deductible

These are expenses that are used exclusively for your daycare. You don’t need to apply the Time-Space Percentage here, they’re fully deductible:

• Toys and Educational Materials: Games, puzzles, books, art supplies, flashcards, and STEM kits. These are only 100% deductible if your own kids don’t use them. If you have young kids at home, you can’t deduct their toys and supplies and you can only deduct part of what is shared.
• Furniture Used Only for Daycare: Cubbies, high chairs, cots, playpens, or small tables and chairs just for children.
• Cleaning Supplies: Disinfectant wipes, bleach, paper towels, mops, and child-safe cleaning products that are used only for daycare.
• Food and Snacks: Meals and snacks you provide can be deducted using either the actual cost method or the standard meal allowance from the USDA (which sets per-meal rates for breakfast, lunch, dinner, and snacks). You cannot deduct meals for your own children, so you’ll have to subtract them from the total.
• Craft and Activity Supplies: Paint, glue, construction paper, cotton balls, sensory bin materials, and themed activity packs.
• Diapers and Wipes: If you provide these as part of your care.
• First Aid Supplies: Band-aids, thermometers, gloves, and baby-safe medications you keep on hand.

More Deductions for Home Daycare

Don’t forget these sometimes overlooked things that are deductible:

• field trip expenses you covered
• party supplies and supplies for events you throw
• fees for tax professionals
• home improvements are partially deductible (remember anything that makes your home look good for attracting business.
• lawn services or lawn equipment
• light bulbs
• business trips (if you take a trip to get supplies, tour facilities and get inspired, or take training the travel and meal expenses are deductable)
• living room furniture
• repair and maintenance of the home to keep it in good working condition

Business-Related Expenses

As a self-employed daycare provider, you may have additional business costs that qualify for deductions:

• Advertising and Marketing: Website fees, social media ads, flyers, and listing fees for sites like Care.com.
• Office Supplies: Printer paper, ink, file folders, pens, notebooks, and calendars.
• Professional Development: Training courses, conferences, certifications, or books that help you stay current in early childhood education.
• Tax Preparation: You can deduct the portion of tax prep fees that apply to your business filing.
• Legal and Licensing Fees: Business registration, background checks, CPR/first aid certification, and state licensing fees.
• Bank Fees: If you have a separate business account, you can deduct any associated fees.

Vehicle and Mileage Deductions

If you use your car for business purposes—like grocery shopping for daycare, attending training, or picking up supplies—you can deduct a portion of your vehicle expenses.

You can use either:

• The Standard Mileage Rate (set annually by the IRS; for 2024 it was 65.5 cents per mile), or
• Actual Expenses: Includes gas, maintenance, insurance, and depreciation—apportioned by the percentage of business use.

Whichever method you choose, you need to keep a mileage log. Write down the date, purpose, starting and ending mileage, and total miles for each trip.

Depreciation of Equipment

Certain larger purchases, like playground equipment, laptops used for daycare records, or a washer and dryer used for daycare laundry, can be depreciated over multiple years. This spreads the deduction over the useful life of the item, which the IRS sets depending on the category.

In some cases, you may be able to take Section 179 depreciation and write off the entire cost in the year you purchased it, but only if the item is used exclusively for your business.

For more on how to do this, I recommend the Family Childcare Tax Workbook. Using it will make sure you get all the right things in all the right places if you plan to prepare your own taxes. If you hire a professional, it will help them get every penny for you. Many preparers are unfamiliar with Family Childcare tax situations and can be helped with the book.

Retirement Contributions and Health Insurance

Being self-employed means you can also deduct:

• Contributions to a SEP IRA or Solo 401(k): These help you save for retirement while reducing your taxable income.
• Self-Employed Health Insurance Premiums: If you pay for your own health insurance and aren’t eligible for an employer plan, you can deduct premiums for yourself and your family.

Common Mistakes to Avoid

Here are some tax pitfalls home daycare providers should watch out for:

• Failing to Track Time Use: Not keeping daily time logs for hours your home is used for daycare (including cleaning and prep time) can limit your deductions. I keep track of mine on the calendar on my sign-in sheet. In Oklahoma, we are required to sign ourselves in and out for work, so I sign in when I start working instead of when kids arrive, and sign out when I finish late at night. That gives me a total of hours worked here at home. Remember meal prep, activity preparation, paperwork, lesson planning, online training that you take at home, toy repair, and anything else you do at home for the business.
• Not Separating Business and Personal Finances: It’s much easier to track expenses and prove deductions when you use a dedicated business account.
• Overestimating Deductions: Claiming 100% of shared-use items (like your couch or TV) without applying the Time-Space Percentage can trigger red flags with the IRS.
• Missing Out on Meal Deductions: Even if parents bring some food, if you provide snacks or fill in meals, you can deduct those.
• Not Claiming Depreciation: This can be a big deduction over time, especially for home-owning providers.

How to Stay Organized

Good record-keeping is key. Use the following tools and habits to stay on track:

• Use a Tax Prep Binder: Store receipts, mileage logs, food expenses, and licensing paperwork in labeled sections.
• Monthly Expense Spreadsheets: Track your income and categorize expenses regularly instead of scrambling at tax time.
• Use Software: Consider tools like KidKare, QuickBooks, or a dedicated home daycare expense tracker.
• Hire a Tax Professional: Especially one familiar with home daycare businesses. They can help you take advantage of every deduction and stay compliant with current tax laws.

Managing taxes for a home daycare doesn’t have to be overwhelming. By understanding what deductions you can claim, and maintaining solid records, you can maximize your write-offs and keep more of what you earn. Whether you’re just starting your daycare or you’ve been caring for children for years, staying informed about your tax options is one of the smartest financial moves you can make. Start early, stay organized, and don’t hesitate to get professional help to make sure your tax season goes smoothly.