Daycare Tax Tips

Are his fiancee's property taxes an allowable business expense?

Not unless the day care provider pays the taxes and co-owns the home

The fiance of a family child care provider writes:

> My fiancee is using our home as a home day care. She is not listed on the mortgage and I am not listed under the day care. Would either of us be able to use the Time x Area deduction on our taxes? If not, what needs to be done to do so? Would she need to be added to the mortgage? (Not the best option as the home is currently underwater in value.) Or do I need to be listed as part owner of the daycare?

This is a common situation for unmarried couples. Once your wedding day comes, it shouldn't be an issue.

In the meantime, the first thing to know is that your fiancee cannot treat any expense as a business deduction unless she pays the cost herself. That is the main issue. She cannot deduct something you pay for.

On the other hand, even if she pays the property taxes from her separate bank account, she won't be allowed the tax deduction, since she does not own the property (I assume). Being on title is what matters when it comes to deducting property taxes. (Do not put your fiance on title without consulting a tax professional. The gift of an ownership share in the house may require you to file a gift tax return.)

Listing yourself as a co-owner of the business is not the way to go either. That actually creates a partnership for tax purposes, which is a whole other can of worms and does nothing to help your fiancee deduct the property taxes.

If you like, you could consult with a tax professional to see if it would be beneficial for your fiancee to pay you some rent. Then she could deduct a portion of that rent as a business expense using her time/space percentage. That gets messy tax-wise, since it would make you a landlord, but as a unit, you two might pay lower taxes overall. Also, weird as this sounds, if your fiancee is paying some of the costs associated with your property (such as the taxes), the Internal Revenue Service might view that as a form of taxable rent anyway.

There are no great options in this situation. I have clients in similar circumstances and they generally just apply their time/space percentage to the home costs they DO pay (such as utilities and repairs) and skip the rest. That is what I recommend. As the homeowner, you can deduct 100% of property taxes you pay on your own tax return anyway (on Schedule A), as long as you meet the requirements for itemizing deductions. Not as great as a business deduction, but the next best thing.

Actually, even with the limitations of your situation, you two will probably pay lower total income tax as single taxpayers than you will as married taxpayers. There is still a pretty significant "marriage penalty" in the tax code that affects most couples.

Last updated 28 August 2011

Posted on 2011-08-29 04:56:55