How to Claim Expenses When You Aren’t in Business a Full Year

6a0133f3fc5805970b0168e55d4677970c-320wi

How does a family child care provider calculate her Time-Space Percentage when she was not in business for the entire year?

Let’s say Paula Provider started caring for children on April 1, 2015. In March she worked 20 hours getting her business ready (organizing her playroom area, writing flyers, developing her contract and policies, taking a first aid class, etc.).

How does Paula calculate her Time-Space Percentage?

Your Time-Space Percentage is important because it determines how much of your house-related expenses you can deduct for your business. These include: property tax, mortgage interest, utilities, house insurance, house repairs, house depreciation, furniture, appliances, equipment, etc.

Because of the thousands of dollars involved, you want to calculate it properly.

Paula should determine how many hours she worked in her home from April 1, 2015 to December 31, 2015. Included in this number should be hours children were present as well as hours she spent on business activities when children were not present. See my article, “What Hours Can You Count?”.

Let’s say Paula worked 11 hours a day caring for children (11 hours a day x 5 days a week = 55 hours a week x 39 weeks = 2,145 hours). She also worked an additional 10 hours a week on other business activities (10 hours x 39 weeks = 390 hours). This would total 2,535 hours.

Paula enters 2,535 hours on IRS Form 8829 Expenses for Business Use of Your Home, line 4.

Form 8829, line 5 shows that there were 8,760 hours in all of 2015. But, since Paula was only in business as of April 1st, she should cross out this number and enter the number of hours in the year from April 1st to December 31st (275 days x 24 hours a day = 6,600 hours).

Paula’s Time percent is 38.4% (2,535 hours divided by 6,600 hours) which would appear on line 6.

Let’s assume that Paula is using all the rooms in her home on a regular basis after April 1st. Her Space percent would be 100% (line 3) and her Time-Space Percentage would be 38.4% (100% x 38.4%).

Paula would then enter her house-related expenses on Form 8829 from April 1st to December 31st. She would not enter the March 2015 utility bill she paid in April, but she would enter the December utility bill she paid in January 2016. She should pro-rate her annual property tax and house insurance bill by 75% (275 days divided by 365 days).

What about the 20 hours Paula worked in March?

I don’t recommend counting hours you work in your home before you start caring for children. The reason is that it will probably lower your Time-Space Percentage. If Paul did count the 20 hours, her total hours worked would be 2,555 (2,535 + 20). She would then divide this by the total number of hours in the year from March 1st to December 31st (6,600 + 744 hours in March = 7,344 hours).

Her Time percent would be: 34.8% (2,555 divided by 7,344). It’s true that Paul could now count 34.8% of all her house expenses from March 1st to December 31st, but I don’t it’s worth doing it this way. The reason is that she would have to use her lower Time-Space % on items such as furniture, appliances, toys, equipment, etc. Unlike her house expenses, these deductions won’t increase if she adds March into her calculation.

 Image credit: mathhockeypokemon.wikispaces.com

2014 TW smallFor more information on how to calculate your Time-Space Percentage and fill out IRS Form 8829, see my Family Child Care Tax Workbook and Organizer.



Categories: Record Keeping & Taxes, Time-Space Percentage

Tags: , , , , , ,

7 replies

  1. Hello Tom,
    I am still quite confused on this. I am working in your tax workbook and only worked part of this year. I calculated the number of hours in a year that I was open for business and recorded on line 5. The time space % I got doing it this way was much higher than when calculating it with 8,760 hours in a year. So, do I use the higher t/s% for all my expenses on Schedule C too or just for the house expenses on form 8829?
    Thanks for all of your information, you are a lifesaver!!!

  2. Put the hours you worked in your home on business activities on line 4. Put the number of hours in the year for those months you were in business on line 5. So, if you worked for 1, 680 hours in 7 months (1,680 on line 4) and there were 5,040 hours in 7 months (5,040 on line 5), your time percentage would be 33.3% on line 6.

  3. Tom,
    I think I know the answer to this, but am having a terrible time trying to get Turbotax to do what I want. I know how to calculate the t/s% (mine is 31.49%) My wife started the in home daycare 08/01/2011. My question relates to mtg interest and taxes. I feel like I should prorate the interest and taxes for the period 08/01/2011-12/31/2011 and put that amount on lines 10 and 11 of Form 8829, and deduct on Form 8829 31.49% of that number. Then deduct the portion that isn’t deducted on Form 8829 on Schedule A. So if my interest was 10,000 for the full year, i would prorate 5 months the house was used for daycare and put 4,167 on line 10, of which 1,312 would be deducted on 8829. Then deduct (10,000-1,312)= 8,688 on Schedule A.
    I appreciate any feedback. Thanks

  4. You are doing it correctly!

  5. Here is exactly what I was looking for! I don’t know what providers would do without you! Thank you so much!!!

  6. Hello! Can you use the calculation to determine your monthly income as well? I am trying to figure out what I make monthly.

  7. Collette – I’m not sure what you are asking. Which calculation are you referring to? In general, monthly income minus monthly expenses = monthly profit. Since you won’t know what your time-space% is until the end of the year, it’s difficult to determine your monthly house expenses until then.

Leave a Reply

Your email address will not be published. Required fields are marked *