Daycare Tax Tips

How do child care partners split the home deductions?

Alison recommends avoiding partnerships

A family child care provider writes:

> My partner and I are both on the license. I am trying to figure out the home (rental) space measurements. Do we split the square footage in half??

It sounds like you are running a home-based child care with a partner. Unfortunately, this is a difficult situation tax-wise. Please consider your options carefully and read Tom Copeland's article entitled Should You Form a Family Child Care Partnership?

I agree with Tom's recommendation that the provider living in the home treat the other provider as an employee. Though many child care providers shy away from employee situations, such an arrangement is actually much simpler and cheaper than setting up a partnership. It may also allow you deduct your entire family's medical costs as a business expense by setting up a medical reimbursement plan as an employee benefit.

A general partnership is a formal business entity which normally must file paperwork with the Secretary of State for the state where the business is located. California partnerships are required by the CA Secretary of State to submit a Statement of Partnership Authority.

Any home expense deductions would have to be taken by the partners as unreimbursed "home office" expense on their individual income tax returns, since that deduction is not available on the partnership tax return that is required to be filed every year.

If both partners live in the home together and want to deduct home expenses, don't split the square footage. (I finally answered this question!) You both report the same square footage. Track your time worked in the home separately. The home deductions will be split based on who actually paid which bills (rent, mortgage, utilities, repairs, insurance, etc.). You could put equal amounts into a joint account, pay the household bills from there, and split them all 50-50.

If only one partner lives in the home, the partner who doesn't live there could pay some rent to the other provider for the use of the building. Then she could deduct the rent as unreimbursed partner expense on her individual income tax return. The downside is that the partner living in the home would have to report the rent received as taxable income.

The last two paragraphs also provide a roadmap for deducting home expenses in the case that you continue to operate as an informal partnership. Though, obviously, not recommended!

Last updated 11 January 2016

Posted on 2009-01-28 20:33:14