Key Deductions: Health Care, Insurance, Transportation, and Meals
Learn more about important tax deductions that you can
take advantage of as a child care business owner
Running a child care business comes with many financial responsibilities, but it also offers opportunities for valuable tax deductions. You can take advantage of deductions relating to health care, insurance, transportation, and meals, which can save you valuable funds that can be reallocated to other areas of your business.
However, it can be difficult to learn about and keep track of all the possible deductions that you can benefit from. To help you, we will review some of the most common tax deductions that you likely qualify for as a child care business owner: health care, insurance, transportation, and meals. By taking advantage of these tax deduction opportunities, you can improve your business’s financial health, benefitting your child care business as a whole.
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) is designed to help individuals and families with low to moderate incomes afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange. The Marketplace is a website created to serve as a place where you can shop for and enroll in health insurance plans. The credit helps to reduce the monthly premium costs for certain health insurance plans.
The calculation for the PTC takes into account your household income, the federal poverty level for your family size and location, and the cost of the second-lowest silver plan available in the Health Insurance Marketplace. Insurance plans offered through the marketplace are usually categorized into four tiers: bronze, silver, gold, and platinum. The credit amount is designed to ensure that you don't have to spend more than a certain percentage of your income on health insurance premiums. If the premium for your chosen plan exceeds this percentage, you can claim the difference as a tax credit when you file your federal income tax return. You should keep records of your total income and the health insurance premiums paid during the year for use at tax time.
Small Business Health Care Tax Credit:
The Small Business Health Care Tax Credit is aimed at small employers who provide health insurance to their employees. To qualify for this credit, your child care business must have fewer than 25 full-time employees, the average annual wages of your full-time employees must be $56,000 or less, and you must pay at least 50% of your full-time employees' premium costs. The tax credit is calculated as a percentage of the premiums you pay for employee health coverage, with a maximum credit of 50% of the premiums paid. For tax-exempt organizations, the maximum credit is 35% of premiums paid. Maintain records of the coverage provided, including the amount of premiums paid by both the employer and employees. The Small Business Health Care Tax Credit requires specific documentation, and it's essential to follow the Internal Revenue Service (IRS) guidelines for eligibility and record-keeping.
Self-Employed Health Care Expense Deductions:
As a self-employed child care business owner, you have the opportunity to reduce your taxable income by deducting qualifying health care expenses. These deductions can be applied towards a range of essential health-related costs, including insurance premiums, medical expenses, prescription drugs, and other health care expenses like dental and vision care.
To claim health care expenses as deductions, maintain records of all related expenses, including receipts for insurance premiums, medical bills, prescription medications, and other out-of-pocket health care costs, to reference at tax time.
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.
Additional Resources:
Need Help?
Visit https://www.childcare.texas.gov/ for related resources, live webinar sessions, and free one-on-one business coaching.
DEVELOPED AND DESIGNED BY CIVITAS STRATEGIES
Disclaimer: The information contained here has been prepared by Civitas Strategies and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information are not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited. Only noncommercial uses of this work are permitted.
Copyright © 2024 Civitas Strategies, LLC