If you run a day care out of your home, you’re allowed to write off business expenses, just like any other small business owner. To ensure you don’t pay more tax than you need to, it’s important to understand your deductions.
Business Use of Home
The business-use-of-home deduction is arguably one of the most valuable deductions for home day care providers. This deduction lets you claim a portion of your home expenses such as utility bills, mortgage or renter’s insurance, and property taxes as business expenses. To calculate your deduction, divide the space you use for day care by the home’s total space. For example, if you use a 20 square metre basement for day care and your home is 140 square metres, you may write off 14% of your eligible bills as business expenses. If you use the space for personal use, you also need to take that into account. To continue, if you use the basement for day care 50 hours per week and for personal use the rest of the time, you should divide 50 hours by 168 hours (the number of hours in the week). Then, you need to multiply the result (0.3) by your eligible expenses. Don’t forget to account for all the spaces in your home. If you use the kitchen for snacks and meals for a couple hours every day, remember to account for that on your return as well.
Day Care Supplies
Anything you buy for the day care such as diapers, snacks, tables and chairs, or toys is a deductible business expense. If you also use something for personal use, you can only write off the portion of the value related to business use. You can claim small expenses (like food or toys) the year when you incurred them, but you have to claim large expenses (like furniture, computers, or home renovation costs) incrementally through your capital cost allowance.
If you incur costs taking your charges on field trips, those costs are also deductible. This includes expenses such as bus tickets and museum admissions. If you drive your own car, you can also claim vehicular expenses.
In addition to taking care of kids, you also have to manage the accounting and bookkeeping side of your business, and the costs you incur doing that are also deductible. For example, if you pay fees to accountants, lawyers, or other professionals for business-related reasons, those costs are deductible. Similarly, you may also claim small business accounting software, a computer for work, and pens to use in the office.
The Canada Revenue Agency typically doesnt offer tax benefits if your day care expenses run higher than your business income for the year. The good news, though, is that you can record your day care business losses and claim them against income from another job. As an alternative, if you dont have income from another source the year you have the business loss, you can roll over the loss and use it in another year. Running a day care can be extremely rewarding, but besides nurturing and caring for children, you also have to nurture and care for the books. To keep your tax liability under control, remember to track your expenses and maximize your deductions.