From the Archives: Tax Implications of the Unlicensed Daycare Provider

It’s Labor Day week, which means I’m re-posting popular stories from the past. New material will resume next Monday the 14th.

I wrote this post about daycare taxation nearly 5 years ago, but it remains one of the most popular posts on this site.

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Originally published December 30, 2010

Update 7/22/12: If you have questions about whether or not your daycare needs to be licensed, please contact DHS, not me. I cannot answer questions about licensing.

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One of the questions about in-home daycare operations that comes up frequently is what the tax consequences are to an unlicensed daycare provider.

Different states have different licensing requirements for daycare providers.  In Iowa, an in-home provider can care for up to 5 children without being registered or licensed.  A provider caring for 6 children must be registered, and a provider caring for 7 or more children must be licensed.  (Read more at the DHS website.)

For tax purposes, your in-home daycare is considered a business whether you or not you are registered or licensed.  Income should be reported as business income; legitimate business expenses can be claimed as a deduction against business income.

The tricky part for the unlicensed/unregistered is figuring out whether they can take the deduction for “business use of the home.”  This deduction allows a taxpayer to partially deduct expenses associated with the house, such as utilities and mortgage interest.  Only daycare operators who are licensed or registered with the state — or who are not required to be licensed or registered — can take the deduction for business use of the home.

So in Iowa, a provider caring for less than 6 children CAN take the deduction for business use of their home, because they aren’t required to be registered or licensed.  But if a provider cares for 6 or more children and is not registered or licensed, then no deduction is allowed for business use of their home.  Of course, aside from the tax deduction issue, there could also be problems with the DHS!