Example of Home Day-Care Deduction Computation

If you are providing day-care services for children, handicapped persons, or persons age 65 or over and have the appropriate state licenses, your home doesn't have to meet the exclusive use test.

As long as your home is used regularly for day-care services you may deduct a portion of home related expenses (mortgage interest, taxes, insurance, electricity, gas, water, maintenance, etc.).

Computing Your Home-Related Day-Care Deduction

You must compute two separate percentages:

  • The percentage of space used for your service
  • The percentage of annual hours used for your service

Once you have determined both percentages, you simply multiply your total annual home expenses by both percentages to determine your deduction.

Follow these steps:

1. Figure out your total annual home expenses (i.e. electricity, insurance, etc.)

2. Divide the square footage used for your service by the total square footage of your home to determine the percentage of space used for your service..

3. Divide the total hours of operation by the total hours in the year.

4. Multiply the total home related expenses by both fractions previously determined.

Example:

  • Your annual home expenses are $12,800.
    • $7,000 mortgage interest
    • $1,000 property taxes
    • $1,500 utilities (electricity and water)
    • $2,000 trash collection
    • $1,300 depreciation on the house
  • Your home has a total of 2,000 square feet
    • You use 1,500 S.F. for your service - 75% (1,500 S.F./2,000 S.F.)
    • Space for day-care related laundry, storage for toys, or a play area for children (a garage for example), may be counted toward the square feet used for day-care services according to the Tax Court.
  • You operate your service 8 hours a day, five days a week, 50 weeks in the year for a total of 2,000 hours (8 x 5 x 50).
    • Total hours in the year: 8,760 (24 x 365)
    • Your percentage of day-care operations is 23% (2,000/8,760)
  • Multiply total home related expenses by both of the above percentages to determine your deduction:
    • ($12,800 x 75%) x 23% = $2,208. This is your total deduction.
      • The 75% is the space used for day-care services.
      • The 34% is the percentage of day-care hours for the year.

Deduction Limited

Your deduction is limited to the amount of net income generated from day-care operations.


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