Home Daycare Tax Deductions: Business Percentage, QBI, and Filing

Home daycare tax deductions fall into three buckets: costs that are fully deductible because they belong entirely to the business, household costs that are partly deductible through a time-space percentage, and depreciation on the portion of your home used for childcare. Home daycare providers get an exception most home-based businesses don’t have: you can deduct a share of household expenses for rooms your family also uses, as long as you use them regularly for daycare. The rest of this article walks through what qualifies, how to calculate the business share, and how to report it correctly.

The Exclusive-Use Exception

Most home-based businesses have to show that a room is used only for work to deduct it. Daycare is the exception. Your living room, kitchen, and basement can count even though your family uses them evenings and weekends, provided you use them regularly for childcare.¹

There’s one gate you have to pass: licensing. You must have applied for, been granted, or be exempt from a state license, certification, or registration as a daycare provider. If your application was denied or your license was revoked, the exception doesn’t apply, and none of the home-related deductions below are available to you.¹ Check your status before claiming anything.

Calculating Your Business Percentage

Household costs like utilities, rent, and insurance get multiplied by a business-use percentage before you deduct them. That percentage has two parts: how much of your home the daycare uses, and how many hours a year you operate.

Space

Measure the square footage of every room used regularly for the daycare and divide by the total square footage of your home. A daycare using a 250 sq ft living room, a 150 sq ft kitchen, and a 400 sq ft basement in a 2,000 sq ft home comes to 800/2,000, or 40%. Include hallways and bathrooms the children use. Sketch a floor plan and keep it. Estimates won’t hold up in an audit.

Time

Divide your annual daycare hours by 8,760 (the total hours in a year). The hours don’t stop when the last child leaves. Time you spend cleaning up, prepping meals for the next day, setting out activities, and doing billing and scheduling all counts. A provider who watches children 10 hours a day, five days a week, for 50 weeks logs 2,500 contact hours. Add 5 hours a week for prep, cleanup, and admin and the total reaches 3,000. Divide by 8,760 and the time percentage is about 34%.¹

You need a daily log. Sign-in and sign-out sheets cover contact hours; a spreadsheet or timekeeping app can capture prep and cleanup. The IRS wants contemporaneous records, meaning logged as you go, not reconstructed at tax time.

Combining the Two

For rooms shared with your family, multiply the space percentage by the time percentage. Using the numbers above, 40% × 34% = about 13.6%. That’s the share of shared household costs you can deduct.¹ A room used exclusively for the daycare (a dedicated office or storage closet) skips the time reduction and gets its full square-footage share. Form 8829 combines both types into a single business percentage.

What You Can Fully Write Off

Some costs belong entirely to the daycare with no personal component. They go straight onto Schedule C at 100%.

Food and Snacks

You have two options. Track every grocery receipt for food served to the children, or use the standard meal and snack rates based on the USDA’s Child and Adult Care Food Program. For the period through June 30, 2026, the Tier I rates in the contiguous states are $1.70 per breakfast, $3.22 per lunch or supper, and $0.96 per snack.² Most providers qualify for Tier I. Multiply by the number of meals and snacks you served across the year and the total often exceeds actual grocery spending.

Even with the standard rates you need a daily meal log showing each child’s name, the date, and which meals and snacks you served. Receipts aren’t required for this method, but the meal count is.

Supplies and Equipment

Anything bought only for the daycare is fully deductible: craft supplies, books, toys, educational materials, diapers, safety gates, outlet covers, and cleaning products used only in daycare areas.

For bigger items that last more than a year (cribs, high chairs, playground equipment), you can deduct the full cost in the year you place them in service using Section 179 expensing rather than depreciating over time.³ The 2026 Section 179 limit is $2,560,000, so no realistic daycare purchase runs into the cap.

Vehicle Miles

Driving for supplies, field trips, or training is deductible. The simplest method is the standard mileage rate, 72.5 cents per mile for 2026.⁴ Alternatively, track actual expenses (gas, insurance, repairs, depreciation) and deduct the business-use share based on miles.⁵ Either way, keep a mileage log with date, destination, purpose, and miles for each trip. Since your home is your workplace, there’s no non-deductible commute.

Other Direct Costs

Advertising (flyers, a website, business cards), professional fees for a tax preparer or accountant, liability insurance premiums for the daycare, and wages paid to any assistants along with the associated payroll taxes are all fully deductible on Schedule C.

Household Costs You Partly Deduct

Multiply each of these by your business-use percentage. The result is what goes on Form 8829.

Utilities and Insurance

Electricity, gas, water, trash, and internet all flow through the time-space allocation. A $3,600 annual electric bill at a 13.6% business percentage yields a $490 deduction. Homeowner’s insurance covering the structure and contents works the same way. Daycare liability insurance, by contrast, is a direct expense at 100%.

Rent, Mortgage Interest, and Property Taxes

Renters apply the business percentage to their rent. Homeowners apply it to mortgage interest and property taxes. The personal portion of mortgage interest and property tax is still available as an itemized deduction on Schedule A if you itemize.

Repairs

Fixing a leaky faucet, patching drywall, or replacing a broken window keeps the home in working condition and is deductible in the year you pay, at the business percentage. A repair confined to a daycare-only room is a direct expense. Larger projects that add value or extend the life of the home (a new roof, a finished basement, a deck) are capital improvements. They get depreciated over time rather than deducted at once.⁶

Depreciating Your Home

Depreciation is one of the largest deductions available to a home daycare provider and requires no current cash outlay. It recovers the cost of the business-use portion of your home over 39 years under the IRS’s Modified Accelerated Cost Recovery System.⁷

Start with your depreciable basis: the lower of what you paid for the home (plus improvements) or its fair market value when the daycare began. Subtract the land value, since land can’t be depreciated. Property tax records usually show a reasonable split between land and structure. Multiply the remaining basis by your business percentage to get the depreciable business basis.

The first-year deduction depends on the month you started, under the IRS mid-month convention. Publication 587’s table runs from 2.461% for January down to 0.107% for December. Full years after that run about 2.564% of the depreciable business basis.⁷

Watch for depreciation recapture. When you sell the home, gain attributable to depreciation you claimed (or were entitled to claim) is taxed at up to 25%, and may also be subject to the 3.8% net investment income tax.⁸ Because the IRS applies recapture on the amount “allowed or allowable,” skipping the deduction doesn’t save you from the tax. Claim it every year.

The 20% QBI Deduction on Top

Beyond your business expenses, you can likely take a 20% deduction on your net daycare profit under Section 199A. The deduction was made permanent in 2025 and applies to sole proprietors filing Schedule C.⁹

The math is simple when your total taxable income (before this deduction) is below the threshold: $197,300 single or $394,600 joint for 2025, with adjustments expected for 2026. Most home daycare providers are well under. Take 20% of net Schedule C profit as an additional deduction using Form 8995. It’s easy to miss and worth real money.

Filing, Self-Employment Tax, and Quarterly Payments

Schedule C and Form 8829

Direct expenses (food, supplies, advertising, vehicle, wages) go on Schedule C. Shared home expenses go through Form 8829, where you enter the time-space calculation and apply it to utilities, insurance, rent or mortgage interest, property taxes, and depreciation.¹⁰ The Form 8829 total flows back to Schedule C.

The Net Income Limitation

Form 8829 deductions can’t exceed the net income from the daycare. If gross income minus direct expenses leaves $3,000 of profit and your home-related deductions total $5,000, you deduct $3,000 this year. The other $2,000 carries forward to next year, subject to the same limit, and the carryover follows you even if you move.¹⁰ New providers with heavy startup home costs and low first-year income are most likely to hit this.

Self-Employment Tax

Net Schedule C profit is subject to self-employment tax at 15.3%: 12.4% Social Security on earnings up to $184,500 in 2026, and 2.9% Medicare with no cap.¹¹¹² Calculate it on Schedule SE. You then deduct the employer-equivalent half (7.65%) as an adjustment to income on Form 1040, which reduces your AGI whether you itemize or not.¹³

Quarterly Estimated Payments

Nobody is withholding tax from your daycare income, so you pay it yourself in quarterly installments covering both income tax and self-employment tax. The 2026 due dates are April 15, June 15, September 15, and January 15, 2027.¹⁴ You can skip the January payment if you file your full return and pay the balance by February 1, 2027.

To avoid an underpayment penalty, pay at least 90% of the current year’s tax or 100% of the prior year’s (110% if your AGI exceeded $150,000).¹⁵ The easiest path is to base payments on last year’s total tax and adjust the fourth-quarter payment once you can see where the current year is landing.

1
Internal Revenue Service. Publication 587 (2025), Business Use of Your Home
2
Food and Nutrition Service. CACFP: Payment and Reimbursement Rates for the Period July 1, 2025, Through June 30, 2026
3
Internal Revenue Service. Depreciation Expense Helps Business Owners Keep More Money
4
Internal Revenue Service. 2026 Standard Mileage Rates
5
Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
6
Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
7
Internal Revenue Service. Publication 587 (2025), Business Use of Your Home – Section: Depreciating Your Home
8
Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 5
9
Internal Revenue Service. Qualified Business Income Deduction
10
Internal Revenue Service. Instructions for Form 8829 (2025)
11
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
12
Social Security Administration. Contribution and Benefit Base
13
Internal Revenue Service. Topic No. 554, Self-Employment Tax
14
Internal Revenue Service. 2026 Form 1040-ES – Estimated Tax for Individuals
15
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty