The business percentage on Line 7 of your Form 8829, Expenses for Business Use of Your Home, determines how much of your home (and other shared) expenses can be treated as a business tax deduction. It is often called the time/space percentage, because of the unique way the business percentage is calculated for family child care businesses, with a time component and a space component. Day care is very special this way! No other type of business qualifies to deduct home expenses when space is used for both business and personal purposes.
Your time/space percentage will be used to determine the business percentage of many expenses for income tax purposes. This can include such things as rent, mortgage interest, home repairs, property tax, utilities (gas, heating oil, electricity, phone service, water, sewer, cable tv, etc.), home insurance, home depreciation and improvements, furnishings, appliances, play equipment, toys, and household/cleaning supplies. I could go on! Boosting your time/space percentage can mean money in your pocket, because it affects so many shared (business/personal) products and services.
Note that instead of using the time/space percentage, you may allocate business use for shared items by calculating an actual business use percentage, but you must be able to document your calculation.
The main way to increase your time/space percentage is by keeping good track of time worked in the home and identifying all space used for business purposes. Having an exclusive-use child care room – used 100% of the time for business purposes all year – can significantly increase your business percentage.
Many child care providers use their entire home regularly for child care purposes. “Regular use” space can include playrooms, nap rooms, storage rooms (if accessed regularly), office space, etc., in addition to the kitchen, common rooms, bathrooms and garage. (Yes, count your garage. You most likely use it for business storage, laundry, home and yard maintenance tools, your business vehicle, etc.) Do not count yard space, however. Only count space under your roof. You can count a deck attached to your home, but not a patio.
Measure your rooms and draw a simple floor plan. Don't rely on historical square footage which is often inaccurate and not properly documented. Keep the floor plan in your records, in case you ever have to show it to an IRS auditor.
FORM 8829 BUSINESS PERCENTAGE CALCULATION EXAMPLE:
Karen has a 2000 square foot home. She uses the entire home regularly for her day care business, except for the 200 square foot master bedroom. This year she was open from 6am to 6pm, Monday through Friday. She or her husband worked an additional 255 hours during the year before opening, after closing, and on weekends. She took a week vacation and eight holidays.
Space Percentage Calculation
2,000 sq. ft. total home area [minus] 200 sq. ft. master bedroom [equals] 1,800 sq. ft. used regularly for child care business purposes
1,800 sq. ft. [divided by] 2,000 sq. ft. = .9000 = 90.00% (space percentage)
Time Percentage Calculation
My time calculation starts with the number of weekdays in a given year, which I determine by looking at a calendar. The time calculation can also be done starting with total days in a year (365 or 366), but you have to watch how the weekends fall to accurately count your regular hours, so I just narrow it down to weekdays at the start. (If you do child care on weekends, this won't work, of course.)
261 total weekdays in the year [minus] 13 days off (5 weekday vacation days and 8 holidays) = 248 total days worked
248 days worked x 12 hours per day = 2,976 regular hours worked
2,976 regular hours worked [plus] 255 additional hours worked = 3,231 total hours worked
3,231 total hours worked / 8,760 total hours in the year = .3688 = 36.88% (time percentage)
Overall Business Percentage for Form 8829
.3688 (time percentage) [times] .9000 (space percentage) = .3319 = 33.19% (time/space business percentage)
I also have an example of this same calculation for a provider with an exclusive use playroom.
Last updated 17 September 2011