Family child care providers are entitled to deduct expenses that are “ordinary and necessary” for their business. Because you are offering a home-based learning environment for children, it’s reasonable to deduct many expenses associated with your house.
This includes expenses associated with cleaning, maintaining and repairing your home. It also includes a home improvement.
Home improvements are expenses for the permanent improvement or modification of your home that increase its value or prolongs its useful life.
Examples of home improvements include: carport, central air conditioning, central security alarm system, deck, furnace, garage, new room addition, porch, remodel kitchen/bathroom/playroom/bedroom/living room, replacement windows, and tile/wood flooring.
Home improvements must be depreciated over 39 years. A house repair can be deducted in one year. House repairs include: painting, wallpapering, replacing broken roof shingles, deck staining, floor sanding, furnace cleaning, plumbing/electrical repairs, and replacing broken glass.
Note: A new rule in 2015 expands the definition of a repair
Treasury Regulation 1.263 redefines what can be treated as a repair.
If you replace less than half of your windows, roof shingles (but not the roofing boards underneath), or less than half of your wood or tile floors you may be able to treat this as a repair and deduct it in one year! See my article, “When is a Home Improvement Now a Repair?” for details.
Home improvements you made before your business began should be added to the value of the home and depreciated as one. Home improvements you make after your business begins should be depreciated separately.
I recommend that all child care providers depreciate their home improvements. You can use my Family Child Care Inventory-Keeper to help you record these improvements. Although the deduction for home improvements may be small each year, they will add up over time. See my article, “Conduct a Household Inventory to Save Money.”
Let’s look at an example: In 2017 you add a deck to the back of your home that costs $4,000. Since the deck is used by both your family and your business, you must multiply the cost by your Time-Space Percentage. If you Time-Space Percentage is 40%, the business portion of the deck is $1,600 ($4,000 x 40% = $1,600). $1,600 depreciated over 39 years results in a $41 deduction each year for 39 years. If you don’t stay in business for the next 39 years (!) you won’t get any depreciation after you are closed.
Note: Congress has passed bonus depreciation rules that allow providers to claim a major portion of the depreciation deduction in the first year. These rules changes from year to year, so see my annual Family Child Care Tax Workbook and Organizer for the latest update.
If you made home improvements either before or after you went into business that you have not yet depreciated, it’s not too late to claim this depreciation. Use IRS Form 3115 when filing your 2012 tax return. See my article, “How to Claim Previously Unclaimed Depreciation.”
Image credit: Tammy Davis Fines
For more information about home improvements, see my book Family Child Care Record Keeping Guide.