“Can I deduct a higher percentage than my Time-Space Percentage of the cost of my swing set? I care for five children and have one of my own. My Time-Space Percentage is 40%.”
The answer is yes.
How much of an item you can deduct in your family child care business depends on how much you use it in your business. If you don’t use an item for your business, you can’t deduct any of the cost. If you use an item 100% of the time for your business, you can deduct 100% of the cost.
What about when the item purchased is used personally as well as for your business?
The general answer is to use your Time-Space Percentage on such shared items to determine your business deduction. There are hundreds and hundreds of items that child care providers apply their Time-Space Percentage to: furniture, appliances, property tax, chairs, beds, cleaning supplies, toys, lawn mower, paper towels, light bulbs, and so on.
Some of these shared items may be used less for your business than your Time-Space Percentage and some may be used more. But, IRS rules allow you to use your Time-Space Percentage for all shared items, rather than taking the time to figure out the actual business use percent of each item.
However, you are not required to use your Time-Space Percentage on all your shared expenses.
If some items are used less than 100% for your business, but a lot more than your Time-Space Percentage, you can use an actual business use percent to determine your deduction. How do you calculate this?
Let’s look at a swing set example.
The best way to calculate your actual business use percent is to track the business use for one or two months. Your records show that your five day care children and your own child use the swing set one hour a day, five days a week. In addition, your own child uses it two hours a week on weekends. So, there were 25 hours a week of business use (five day care children x one hour a day x five days) and 7 hours a week personal use, for a total of 32 hours a week. 25 divided by 32 = 78% business use.
If the swing set cost $1,000, you could deduct $780 of the cost.
It’s important to keep some records showing your actual business use. Don’t guestimate this. If, in this example, you said your business use was 75%, without having tracked any actual use of the swing set, you will have a hard time defending your percentage in an IRA audit.
Try to track the actual use for at least a month (preferably two). It makes the most sense to use an actual business use percent for items that cost hundreds of dollars and are used a lot more than your Time-Space Percentage. Don’t try using an actual business use percent for your toilet paper!
You can use the Time-Space Percentage for most of your items and an actual business use percent for those selected items that are use heavily for your business.
Image credit: walmart.com
For more information on the actual business use percent and the Time-Space Percentage, see my book Family Child Care Record Keeping Guide.