In 2007 I surveyed over 500 child care providers for my book on money management. I found that 74% reported a business profit of less than $20,000, and only 5% made a profit of $40,000 or more.
It’s not uncommon that some child care providers occasionally show a business loss. What happens in this situation?
There are some limitations of what deductions may be claimed if a child care provider tries to report a loss on her tax return. The house expenses that appear on IRS Form 8829 Expenses for Business Use of Your Home cannot create or increase a business loss. Instead, un-allowed expenses can be carried forward to the next year.
For example, let’s say you show $25,000 of income and $20,000 of expenses on Schedule C (before taking into account Form 8829 expenses). Your tentative profit is $5,000. If your house expenses on Form 8829 total $8,000, you will only be able to deduct $5,000 of them (which will create a zero profit) and roll over the other $3,000 of expenses to the next year.