Should You Move Your Child Care Business Out of Your Home?

Are you considering whether to do child care out of a home you don't live in? If so, you should consider many different factors before making a decision.

Not all states allow family child care providers to operate their business out of a home they don't live in. Check with your local licensor. Also find out if the regulations differ - they may be stricter.

There are some advantages of making this move:

* Your own family will have more privacy and freedom from the clutter of the child care business.

* Your new location may allow you to care for more children.

* Your new location may be more suitable for children or in a better neighborhood to attract parents.

* If you buy the new building, you will get the benefit of rising home values over time.

The biggest potential disadvantage is financial.

Running your business out of home you don’t live in allows you to deduct 100% of the costs associated with that home: rent, mortgage interest, property taxes, utilities, house depreciation, house insurance and house repairs. You can also deduct 100% of the cost of furniture, appliances, decorations, kitchen supplies, and so on.

But before you think that claiming all of these additional deductions and thus reducing your taxes is a good idea – stop!

Rather than focusing on how much less you might pay in taxes, look at how much more or less cash you will have after paying your taxes. Doing child care in another home means you are paying house expenses on two homes, not one.

How much cash on hand would you have if you continued doing child care in your home versus moving your business to another location? Let’s assume your income is the same, your house expenses for both homes is the same, and other business expenses are the same.

Current Home

Income: $35,000Home Expenses (business): $10,000 x 40% Time-Space % = $4,000Taxes (30%): $31,000 x 30% = $9,300Profit: $21,700 ($35,000 – $4,000 – $9,300)Home Expenses (personal): $6,000Cash on hand at end of year: $15,700 ($35,000 – $4,000 – $9,300 – $6,000)

New Home

Income: $35,000Home Expenses (business): $10,000Taxes (30%): $25,000 x 30% = $7,500Profit: $17,500 ($35,000 – $10,000 – $7,500)Home Expenses (first home): $10,000Cash on hand at end of year: $7,500 ($35,000 – $10,000 – $7,500 – $10,000)

Result? You have $8,200 ($15,700 – $7,500) less cash on hand after moving your business.

You will need to earn at least $8,200 more in fees to offset this extra expense. That means if you cared for an additional child, at $157 per week, you would be back where you started financially. Therefore, because of the additional expenses of maintaining two houses, you will need to earn more money doing child care in the new location to make it pay off financially.

I would recommend talking with a tax professional to help you “run the numbers” and advise you about the potential financial implications in your situation (which will probably vary from my example).

Other considerations before making this decision:

* Property taxes may be higher in the new home because you aren’t living in it.

* Talk to your car insurance and homeowners insurance agent to see if your premiums will rise.

You may want to operate your business out of a different home for your own reasons. I do suggest that you weigh the financial implications, so you will be able to make an informed decision about what’s best for you, your business, and your family.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://listwithclever.com/real-estate-blog/how-to-buy-second-home-rent-first-out/

For further details, see Chapter 9 of my book Family Child Care Money Management and Retirement Guide.