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

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 1st. 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 1st to December 31st. Included in this number should be hours children were present as well as hours she spent on business activities when children were not present.

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 the year. 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 utility bill she paid in April, but she would enter the December utility bill she paid the following January. 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.

Tom Copeland - www.tomcopelandblog.com 

Image credit: https://publicdomainvectors.org/en/free-clipart/Colorful-home-vector-clip-art/20181.html

For 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.