Daycare Tax Tips

Can I deduct the cost of items purchased before I got my license?

Alison responds and explains about start-up costs

A family child care provider writes:

> Although I did not receive my childcare license until this year, I purchased many items and supplies last year. I don't want to miss out on these deductions. I also earned a little money caring for two children while their mom attended college courses.

We need to determine if your child care business start date was last year or this year. It sounds like it was last year, if that's when you started caring for those two kids. You don't need a license in California when caring for the children of only one family. Plus, the license issue is really immaterial as far as the IRS is concerned. Even unlicensed child care providers file tax returns and report their business income and expenses. If a required license is not obtained or at least applied for, however, no home expense deduction will be allowed.

Going by IRS rules, a child care provider's business start date will generally be either the day she started caring for children or the day she was ready to care for children and was promoting her business and looking for children to enroll in her program. However, I find it works best if providers use the date they started caring for children.

If you incur child care business-related expenses before your start date, these are considered "start-up costs" or "start-up expenses." Such costs are deductible whether you paid cash or put the expense on a credit card, but they must be listed separately on your tax return.

Start-up expenses are deducted on your income tax return for the year your business officially started (based on your start date). Even costs incurred in previous years can be included. You can deduct up to $5,000 as startup costs on your first year tax return.* Any start-up costs exceeding $5,000 can be spread out and deduct (amortized) over 15 years.

Here is how I have my clients to categorize their business expenses in the first year:

First, make a list of any single items (equipment, furniture, play structures, etc.) that cost $100 or more. List all such items, whether purchased prior to or during the first year of business. Include a description, the cost, and the date of purchase for each item listed. For anything purchased before your start date, estimate the item's resale value as of that date. (Items listed here will fall under the rules for depreciation. They should not be included in your start-up cost deduction.)

Next, combine all other items purchased before your start date into a start-up expense total.

Lastly, organize the rest of your expenses into appropriate shared and 100%-business-use categories. Shared expenses are those that have a component of personal use. 100% expenses are purely business related. For instance, you will probably have two categories for supplies: shared supplies like paper goods and your 100% business use supplies. The same goes for office expenses, repairs, toys, etc.

*This usually isn't an issue for child care providers, but be aware that the allowable $5,000 deduction is reduced by the amount your total start-up costs exceed $50,000.

Last updated: 30 November 2011

Posted on 2009-01-28 23:00:36