Key deductions

Health care 

There are many health care-related deductions that you can take advantage of. Whether you’re offering health care benefits to your employees or you are self-employed, there are a variety of deductions that may be applicable to your business.  

The Premium Tax Credit:  

The Premium Tax Credit (PTC) helps people and families with low to average incomes pay for health insurance. This insurance must be bought through the Health Insurance Marketplace, also called the Exchange. The Marketplace is a website where you can find and sign up for health insurance plans. The PTC lowers the cost of your monthly health insurance payments for some plans.

To figure out the PTC, your household income, the federal poverty level for your family size and where you live, and the cost of a silver plan in the Health Insurance Marketplace are considered. Insurance plans on the marketplace are often grouped into four levels: bronze, silver, gold, and platinum. The PTC is meant to make sure you do not have to spend too much of your income on health insurance payments. If your plan costs more than that percentage of your income, you can get the difference back as a tax credit when you file your taxes. Remember to keep track of your income and the health insurance payments you made during the year. You will need this information when you file your taxes.

Small Business Health Care Tax Credit:  

The Small Business Health Care Tax Credit is for small businesses that help their employees get health insurance. To use this credit, your child care business must have less than 25 full-time employees. Also, the average yearly pay for your full-time employees must be $56,000 or less. You must also pay at least half of your full-time employees' health insurance costs. The tax credit is a part of the money you pay for employee health insurance. The most you can get back is 50% of what you paid. For groups that do not pay taxes, the most you can get back is 35% of what you paid. Keep records of the insurance you give to employees, including how much you and your employees paid. The Small Business Health Care Tax Credit has rules about what papers you need, so follow the Internal Revenue Service (IRS) rules for who can use it and how to keep records.

Self-Employed Health Care Expense Deductions:  

If you own a child care business and work for yourself, you can lower your taxable income by deducting some health care costs. These costs can include things like insurance payments, doctor bills, medicine, and other health care costs like dental and eye care.

To deduct health care costs, keep records of all your health-related expenses. This includes receipts for insurance payments, doctor bills, prescriptions, and other health costs you paid for yourself. You will need these records when you file your taxes.

Insurance  

As a business owner, you can deduct certain insurance premiums and costs as long as you meet the qualifications.  

Business-Related Insurance:  

As a business owner, you can deduct 100% of the premiums for business-related insurance, such as liability insurance or property insurance. Keep records of your payments and clearly indicate how these policies are used for business purposes. When tax time comes around, you can claim these premium costs as business expenses.   

Homeowners Insurance:  

For providers who operate their businesses from their homes, homeowners insurance can be partially deductible. The deductible amount is based on the portion of your home used for your child care business. For example, if 10% of your home’s square footage is used for child care, you can deduct 10% of your homeowners insurance.  

To determine the deductible portion of the cost, you can use the time-space percentage calculation which calculates the percentage of your home used exclusively for business purposes. Keep detailed records of the square footage of your home used exclusively for your business and receipts of the cost of your homeowners insurance. These records can also help you determine the deductible portion of other home-related expenses like mortgage interest, utilities, and maintenance costs.  

Transportation  

When it comes to transportation deductions, you have two methods to choose from to determine your deduction amount: the actual expenses method or the mileage rate method. It is important to select one method; you cannot use both methods to determine your transportation deduction.  

Actual Expenses Deduction:  

If you have a vehicle for your child care business or use your own car for business purposes, you can deduct the costs incurred. This includes expenses like fuel, maintenance, insurance, parking fees, and vehicle registration fees. If you have a vehicle that is solely for business use, you can deduct 100% of the costs. If you use a personal vehicle for business purposes occasionally, you can only deduct a portion of your expenses based on the amount you use the vehicle for your business.  

For example, if you take five trips in your car per week and one of those trips is solely for business reasons, you can deduct 20% of the costs incurred. Deductible trips include travel to the supermarket to buy food for your business, transporting children to and from activities, running errands for business operations, and even travelling to child care training sessions.  

This is a simplified example, but it highlights the importance of keeping detailed records of expenses and business uses to accurately calculate and claim this deduction. Differentiating between personal and business use is essential. You may find it helpful to use a dedicated business credit card or account for vehicle-related expenses to simplify record-keeping.  

Mileage Rate Deduction:  

Alternatively, you can choose the mileage rate deduction. When using this method, you must track the number of business miles driven during the year and multiply it by the IRS-approved mileage rate to calculate your deduction amount. For 2024, the standard mileage rate is $0.67 a mile.  

Depending on your vehicle use, this simplified approach may be easier than the actual expenses method. When choosing the mileage rate deduction, keep a mileage log that records the date, purpose of the trip, starting and ending odometer readings, and total miles driven for business purposes. Come tax time, you will have a comprehensive log of the miles driven for business purposes that you can easily multiply by the mileage rate.  

Meals 

As a child care provider, you can deduct food expenses related to your business at tax time. To benefit from this deduction, maintain detailed and accurate records of food purchases and meals served in your business operations.   

Deductibility of Food for Children and Employees:  

Child care business owners can deduct the cost of meals and snacks provided to the children in their care and their working employees as a business expense. This includes the cost of groceries, beverages, and snacks. Remember to include all costs related to preparing and serving food, such as paper towels, napkins and containers for storing leftovers.  

Maintain records of food expenses for children and employees, including receipts for groceries, invoices from food suppliers, and menus showing the meals provided. Document the date, location, and purpose of each meal, as well as the individuals involved and their business roles. Categorize these expenses clearly as child care meal costs to support your deduction claims.  

Using CACFP Rates:  

Home-based child care providers can choose to use the Child and Adult Care Food Program (CACFP) rates to calculate meal reimbursement amounts. If you are a family child care provider you can use the CACFP Tier I Standard Meal Rate to calculate your meals deduction, even if you don’t participate in the program. The CACFP reimbursement rates are organized into two tiers that are based on the nutrition composition of the meals. Tier I is a higher reimbursement rate than Tier II. In most cases, this results in a higher deduction and simplifies that process compared to tracking the actual cost of each meal.  

It's important to keep accurate records and ensure that these expenses are directly related to your business. Ensure that you have documentation of the applicable reimbursement rates and the number of eligible meals served to children.   

By understanding and leveraging these key deductions, you not only save funds but can reallocate your savings to other key areas of your child care business to ensure success. Remember to maintain meticulous records, consult with a tax professional for more guidance, and stay up to date on tax laws.  

 Disclaimer

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.