Take Advantage of the Exclusive Use Room Rule
A family child care provider recently told me that her tax preparer entered a Time-Space Percentage of 7% on her tax return, when the correct amount was 38%.
How did this happen? The answer is the exclusive use room rule.
This rule is unique to family child care and it allows providers to claim rooms in their home that are used exclusively for their business, as well as rooms used on a regular basis for their business. This rule is clearly spelled out on page two of the Instructions to Form 8829 Expenses For Business Use of Your Home. Unfortunately, many tax preparers and providers don't understand this rule, resulting in a much lower Time-Space Percentage and therefore lower tax deductions.
In this case the provider had given her tax preparer the square footage of her exclusive use room and her regular use rooms, but the tax preparer only entered the square footage of the exclusive use room on Form 8829.
How the exclusive use room rule works
An exclusive use room is a room that is never, ever used personally. This is a strict rule. If you use the room even once during the year for personal purposes you cannot take advantage of this rule. Don’t try to use this rule unless you are absolutely certain you qualify.
Here’s an example of how this rule works. Let’s say your home is 2,000 square feet and you have an exclusive use room that is 200 square feet. The rest of the home is regularly used for your business. Your Time Percent is 40%.
Step One: Calculate the business use percentage of the exclusive use room: 200 square feet divided by 2,000 square feet = 10%
Step Two: Calculate the Time-Space Percentage of the rest of the home: 1,800 square feet of regular use space divided by 2,000 square feet = 90%
Space 90% Space x 40% Time = 36%
Step Three: Add the totals from Step One and Two together:10% + 36% = 46%
Time-Space Percentage
Note: If you had used the 200 square foot room only regularly for your business, your Time-Space Percentage would have been 40% (100% Space x 40% Time). Applying the exclusive use room increased it by 6%, which is significant!
The Instructions to IRS Form 8829 tells child care providers to do this calculation on a separate piece of paper and then attach it to the form. Enter the Time-Space Percentage on line 7 of Form 8829 and leave lines 1-6 blank.
Here are the details of these instructions:
"Special Computation for Certain Daycare Facilities
If the part of your home used as a daycare facility includes areas used exclusively for business as well as other areas used only partly for business, you cannot figure your business percentage using Part I. Instead, follow these three steps:
Figure the business percentage of the part of your home used exclusively for business by dividing the area used exclusively for business by the total area of the home.
Figure the business percentage of the part of your home used only partly for business by following the same method used in Part I of the form, but enter on line 1 of your computation only the area of the home used partly for business.
Add the business percentages you figured in the first two steps and enter the result on line 7. Attach a statement with your computation and enter “See attached computation” directly above the percentage you entered on line 7."
Take pictures of the room to help you prove that you had an exclusive use room if you are audited. If you have young children of your own take pictures of your children’s bedrooms and toys. This can help prove that they do not need to enter the exclusive use room after the day care children are gone.
Comment: This tax preparer should never have made this mistake. The Instructions to Form 8829 are very clear about how to use this rule. I've talked with another tax preparer who refused to allow a provider to claim both exclusive use rooms and regular use rooms, even after I pointed out these instructions to him! Providers need to be aware of the major benefit of using this rule and insist that their tax preparer allow them to claim a higher Time-Space Percentage.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.four-c.org/types-child-care/
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My book Family Child Care Record Keeping Guide has a comprehensive chapter on how to calculate your Time-Space Percentage.
