Part IV.
This is part II of a four-part series on the Time-Space Percentage. Part I was The Time-Space Percentage Quiz. Part III is How to Calculate Your Space Percent. Part IV is How to Claim The Exclusive Use Rule.
"Can I count the hours I spend cleaning my home?"
"Can I count the hours I spend on the Internet?"
"Can I count the hours I spend at a workshop on child development?"
What are these family child care providers asking about?
Time is money. This is particularly true for family child care providers because the more time you work in your home the lower your taxes. The hours you work are used as part of a formula called the Time-Space Percentage (T/S%) that determines how much of your home you can deduct as a business expense.
You want to make sure your T/S% is accurate because it will be applied to thousands of dollars worth of expenses: property tax, mortgage interest, house insurance, utilities, house depreciation, toys, furniture, appliances, and much more.
To calculate your T/S% you must first calculate your Time Percent and then your Space Percent.
The Time Percent
This percent is determined by adding up the number of hours you are using your home for business purposes and dividing this number by the total number of hours in the year (8,760). There are two types of hours to include: hours when day care children are present in your home and hours when children are not present but you are engaged in business activitites.
Hours when children are present in your home
Count hours from the moment the first child arrives until the last child leaves. Don't count the hours of operation as reflected in your contract; instead keep records of the actual hours children are present. If you care for children from 7 am to 5:30 pm that's ten and a half hours a day or 31% of the week. If your pick up time is 5:30 pm but the last parent usually leaves closer to 6:00 pm count this extra time. A half hour a day every day is equal to 1.5% of the year, which is significant when applied to all your house expenses.
Hours when children are not present in your home
Count all hours spent on business activities such as: cleaning, meal preparation, activity preparation, record keeping, parent interviews, parent phone calls, time spent on the Internet, and so on. Such activities may be done by your spouse (cleaning toys) or by your own children (laundry). Don't count time spent away from your home, even if you are engaged in a business activity (training workshop, transporting day care children).
Tracking your hours
Keeping track of your attendance hours is relatively simple; tracking the hours you work when children are gone requires more effort. Try to keep a daily record of all the hours you work when children are gone for at least two months each year. Use the average hours worked for these two months for the rest of the year. Mark this time on a calendar and note what time of day you did the work.
Carefully tracking the hours you work after children are gone is perhaps the most important thing you can do to reduce your taxes. Most child care providers underestimate these hours and pay higher taxes as a result. Every one and a half hours of work each week is equal to a rise of about 1% in your Time-Space Percentage. Although this might seem a small amount it's not when applied to thousands of dollars of house expenses.
The average amount of time providers care for children is about eleven hours a day, five days a week. This is equal to 33% of the year. The average amount of time child care providers conduct business activities after the children are gone is about 14 hours a week, or about 8% of the year. Therefore, a typical child care provider's Time Percent is around 40%. Yours may be higher or lower.
Enter your Time Percent on Part I of
IRS Form 8829 Expenses for Business Use of Your Home.
I have answered a lot of questions about the T/S% at the
daycare.com child care forum.
"Must I count the space in my basement and garage?"
"Can I count my downstairs room if licensing rules prohibit me having day care children downstairs?"
"Can I my own child's bedroom if he takes a nap in it everyday but day care children do not enter the room?"
What are these family child care providers asking about?
The Time-Space Percentage (T/S%) is the single most important number for a child care provider to accurately calculate because it will make the biggest difference in reducing your taxes.
Your T/S% represents the proportion of your home that is used for business purposes. You will use it to determine how much of the thousands of dollars of your house-related expenses you can deduct.
To calculate your T/S% you must first calculate your Time Percent and then your Space Percent.
The Space Percent
Your Space Percent is calculated by dividing the number of square feet in your home used on a regular basis for your business by the total number of square feet in your home.
Look at each room in your home and ask, "Am I using this room on a regular basis for my business?" If the answer is yes, count all the square feet in the room; if no, don't count any of the square feet. Your living room, dining room, kitchen, bathroom, entryway, playroom, and pantry are probably all regularly used in your business. A bedroom used by children for naps 30 minutes each day is considered regular use. Using a room 2-3 times a week is probably regular use.
You must count your basement and garage as part of the total square feet of your home
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If your state licensing rules prohibit you from bringing children into your basement you may still be able to count the basement space as regular use if it contains a furnace area, laundry room, or storage area for household items used in your business (tools, household supplies, etc.). Children don't have to be in a room for the room to be considered as regular use.
If you use your garage to store a car used for your business, tools, bikes, garbage can, recycling, garden supplies, etc. you could consider your garage as regular use.
Rooms that would not be considered as regular use would be a bedroom never used by the day care children, a personal bathroom never used by the children, or a gun room.
Most providers count all the rooms in their home as regular use and therefore their Space Percent would be 100%. Don't be afraid to claim a 100% Space Percent!
After calculating your Space Percent multiply it by your Time Percent to get your T/S%. Most providers who work full-time, year round will probably have a T/S% of between 30-45%. You must recalculate your T/S% each year.
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How to Measure Your Home
How much space you use in your family child care home for your business can make a big difference in how much you might owe in taxes.
Determining the square footage of your home is an important part of calculating your Time-Space Percentage. Your Time-Space Percentage is used to figure out how much of your house expenses you can deduct for your business.
To calculate your Space Percentage you need to determine the number of square feet you use in your home on a regular basis for your business. You can count a room as regular use if you use it two-three times per week for your business. Children don’t have to be in a room to count it as regular use.
Once you have determined that a room is regularly used for your business you need to know the square footage of the room.
Add up the square footage of space used regularly for your business and divide by the total square footage of your home. The result is your Space Percentage.
What spaces count?
Don’t count your driveway, patio, lawn, or outdoor play area. These aren’t considered part of the structure of your home and so are not part of the total square footage of your home.
Do count decks, porches, garages (even if detached) and basements as part of the total square footage of your home. Many family child care providers use these areas on a regular basis for their business.
Count the area of a closet as part of the area of the room it’s in. IRS rules aren’t clear about whether an unfinished attic should be considered part of the home.
Which of the following rooms can a family child care provider claim under the exclusive use rule?
A) A downstairs room where day care children play that also contains a coat closet that the child care provider's family uses.
B) A remodeled garage that is turned into a children's play room. The child care provider has no children of her own living at home.
C) A children's play room that is by the day care children. The child care provider has young children of her own that use the room only during child care hours.
Answer: B and C.
Family child care providers can substantially increase their Time-Space Percentage (T/S%) if they have one or more rooms that are exclusively used for their business. 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 T/S% 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% T/S%
Note: If you had used the 200 square foot room only regularly for your business your T/S% would have been 40% (100% Space x 40% Time). Applying the exclusive use room increased your T/S% 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 T/S% on line 7 of Form 8829.
Family child care providers are the only home-based business that can have both regular use rooms and exclusive use rooms. If you have such a room be sure to take advantage of it as doing so will significantly decrease your taxes.
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 so the auditor can see that they do not need to enter the exclusive use room after the day care children are gone.
“Should I count my unfinished basement in the square foot calculation of my Time-Space %?”
- Yes. You can count your basement as regularly used for your business if you have a laundry room, storage areas that are used for your business.
“Should I count an unattached storage building as part of the square footage of my home?”
- No. If you do, you will have to pay taxes on any profit associated with the sale of the storage building when you sell your home.
“Can I count the hours for my Time-Space % if I am away from my home but someone else is in my home cleaning?”
- Yes. What matters is if your home is being used for business purposes, not who is doing the business work. If the person is cleaning business and personal areas, only count part of the time.
“Can I use the Time-Space % if I rent my home?”
- Yes. Use this for your rent, renter’s insurance, utilities, as well as your furniture, appliances, and household items.
“What is the best way to keep track of time spent doing daycare when children are not present?”
- Track at least two months of records on a calendar. Each day indicate what time of day you did these activities (so we can see that it’s not during day care hours) and what you did (cleaning, activity preparation, meal preparation, parent phone calls, time on the Internet, etc.). Use the average number of hours per week for the entire year. Do this each year. See my article for more information on how to do this.
“Can I count time shoveling snow or painting the outside of my home?”
- You can only count time spent on activities that you would not otherwise do, except for the fact that you are doing child care. Shoveling snow at 5:30am I would count because you wouldn’t be doing this at 5:30am if you weren’t in business. I would not count mowing the lawn or painting the outside of your home because you would do these activities even if you weren’t in business. You can deduct the cost of the lawn mower and painting supplies or the cost of hiring someone to paint your home. Use your Time-Space % of the cost.
“If I used a room exclusively for my business can I count all of the time I clean it?”
- Yes. See my article on how to claim an exclusive use room.
“Can I count the time I spent shopping for daycare food or supplies while away from my home?”
- No. You can’t count time if you are away from your home because you are not wearing out or using your home.
“Is pest control costs subject to the Time-Space %?”
- Yes, unless the pests only affect your daycare children. Not likely!
“When I wash bedding, etc. can I count the whole time it takes to do the laundry?”
- Only if you stand in front of the washer and dryer and watch! Count the time to remove the bedding from the beds, carry them to the laundry room, put them in the washing machine, take them out of the washing machine and putting them in the dryer, taking them out of the dryer, and putting them back on the bed or storing them.
“Can I count the hours I prepare my own taxes?”
- Yes, for your business tax forms (Form 8829, Form 4562, Schedule C, Schedule SE, Form 3115). No, for your personal tax forms (Form 1040, Schedule A, etc.).
“Is it a ‘red flag’ if my Time-Space % is larger because I offer 1st and 2nd shift child care six times a week?”
- No. Keep good records and count all the hours you are caring for children.
“I spent a lot of time last year preparing my home for daycare, but I didn’t open until December. Should I count these hours?”
- Probably not. If you counted these hours you would have to divide them by the number of hours in the year from when you started preparing. Unless your average weekly preparation hours were larger than your average weekly hours after you started your business, your Time-Space % will be lower.
“Do I count a covered porch that is used exclusively for my daycare?”
- Yes, this can be counted as an exclusive use room.
“Should I start counting the time when I leave to pick up children from school in the morning or the time they arrive at my home?”
- Only count time when you are in your home. So, start counting when the children arrive, not when you leave to pick them up.
“Can I count the time I’m away from my home on field trips with the children?”
- If you leave on a field trip in the middle of the day and return later in the day, don’t subtract these hours from the time you use your home for your business. If you leave your home at 4pm and take children on a field trip and drop off the children at their home, stop counting hours at 4pm.
Image credit: www.colourbox.com
Tom Copeland, www.tomcopelandblog.com
Most family child care providers have a written contract and policies that spell out rules they expect parents to follow.
