YouTube video text script - Home Office Deduction for Daycare Providers (Simplified Method)
Hello, my name is Helen, and I work for the IRS.
Today I will show you how to claim a deduction for business use of the home using the simplified method.
The simplified method is less burdensome; it requires less paperwork and recordkeeping than the regular method. It is available for homeowners and renters and applies to all types of homes.
You can elect, from year to year, whichever method - simplified or regular - allows you the best deduction. Some taxpayers may find the regular method is the most beneficial.
This deduction is for federal income tax purposes and may not qualify as a deduction on your state or local income tax return. Please consult your tax professional for further information.
The simplified method does not change the criteria for who may claim a home office deduction. See Publication 587, Business Use of the Home, to review the qualifications to make sure you are eligible.
Some of the highlights of the simplified method are:
A standard deduction of $5 per square foot for your home office with a maximum 300 square feet. That means a potential deduction of up to $1,500..
You can claim all your allowable home-related itemized deductions such as mortgage interest and real estate taxes in full on Schedule A, and there is no home depreciation deduction or later recapture of depreciation for the years the simplified method is used. To figure your deduction using the simplified method, you need to know the following for each qualified business use of the home.
The square footage of your office or workspace used in conducting the business. This is the allowable area. If you did not conduct your business for the entire year in the home, or the area changed during the year, you will need to know the allowable area used and the number of days you conducted the business each month, the income from the business use of your home, and the amount of your business expenses that are not related to the use of your home. To figure the dollar amount you can deduct using the simplified method for your daycare business, you must use the Simplified Method Worksheet in the Instructions for Schedule C.
In addition to this worksheet, for daycare facilities not used exclusively for business, you must complete the Daycare Facility Worksheet found in the Instructions for Schedule C. If you do not use the area of your home exclusively for daycare, you must reduce the prescribed rate, which is a maximum of $5 per square foot, before figuring your deduction.
If you used at least 300 square feet for daycare facilities regularly and exclusively during the year, you do not need to reduce the prescribed rate or complete the Daycare Facility Worksheet.
Report this deduction on Schedule C, Form 1040.
OK, let’s walk through how to complete the Daycare Facility Worksheet for those that use the space in their home for a daycare facility on a regular, but not exclusive, basis.
Line 1. Multiply days used for daycare during the year by hours used per day. Enter the total number of hours the facility was used for daycare during the year.
Example, your home is used Monday through Friday for 12 hours per day for 250 days during the year. It is also used on 50 Saturdays for 8 hours a day. Enter 3,400 hours on Line 1 (3,000 hours for weekdays plus 400 hours for Saturdays).
Line 2. Total hours available for use during the year. If you used your home for daycare during the entire year, multiply 365 days (366 for a leap year) by 24 hours, and enter the result on Line 2, which is 8,760 hours.
If you started or stopped using your home for daycare during the year, you must prorate the number of hours based on the number of days the home was available for daycare. So, you would multiply 24 hours by the number of days available and enter that result on Line 2.
Line 3. Divide Line 1 by Line 2. Enter the result as a decimal amount here and on Line 3b of the Simplified Method Worksheet. In this case, the decimal amount is 0.388.
OK, let’s walk through the Simplified Method Worksheet found in the Instructions for Schedule C.
Line 1. Enter the amount of the gross income limitation.
Line 2. Allowable square footage for the qualified business use. Do not enter more than 300 square feet.
Line 3. Simplified method amount.
3a. You would enter the maximum allowable amount, which is $5.
3b. For daycare facilities used exclusively for business, enter 1.0. For daycare facilities not used exclusively for business, enter the decimal amount from the Daycare Facility Worksheet. In this example, use 0.388 as we computed earlier.
3c. Multiply Line 3a by Line 3b and enter result to 2 decimal places. In this example, the amount is $1.94 ($5 X 0.388).
Line 4. Multiply Line 2 by Line 3c.
Line 5 is your allowable expenses using the simplified method. Here you would enter the smaller of Line 1 or Line 4 and include that amount on Schedule C, Line 30. If zero or less, enter -0-.
That’s all there is to it. If you need additional information, you can find many helpful resources on IRS.gov by visiting the Small Business and Self Employed Tax Center. The web address is www.irs.gov/smallbiz with a “z.”
Thank you for watching.