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Tax credits to support daycare business expansion
A tax credit is an amount of money that businesses can use to reduce the taxes they owe. For example, if your business had a tax credit of $450 and owed $500, your tax owed would be $50. While tax credits rarely end in a refund, they can help your business save money by freeing up funds you would’ve spent on paying the IRS.
There are several tax credits available that can help you save money to use for growing your childcare businesses. Some of them include:
Work opportunity tax credit (WOTC)
The work opportunity tax credit (WOTC) is a federal tax credit offered to employers who hire and employ individuals from targeted groups who face challenges when looking for employment. These target groups include:
- Veterans
- Individuals between 18 and 40 years old who live in designated, distressed urban and rural communities
- Persons with physical or mental disabilities who are receiving or have completed rehabilitative services
- Long-term unemployment recipients
Employer-provided childcare credit
Employer-provided childcare credit is a general business credit, but it can seem like a no-brainer for childcare businesses when you already offer childcare services. Business owners become eligible for this tax credit when they offer child care to their employees. You can receive a tax credit of up to $150,000 per year to offset 25% of facility expenses and 10% of qualified childcare resources.
Retirement plans startup costs tax credit
Businesses with up to 100 employees can claim a tax credit of up to $5,000, for three years, for the cost of setting up retirement plans such as SEP, SIMPLE IRA, or 401(k) plans for employees. The retirement plan tax credit covers 50% of your eligible startup costs.
Note that retirement plan startup costs are tax-deductible expenses, but you can’t claim the credit for and deduct the cost of the same expenses. If you claim the credit, which you don’t have to, you cannot have the startup costs deducted from your taxable income.
Commercial clean vehicle credit
As a childcare provider, you may decide to get a car, truck, or van to expand your services. Business-related use of this car could be for local trips to a park or field trips to a zoo or aquarium. Your business can receive a commercial clean vehicle credit of up to $40,000 if it meets the requirements for qualifying commercial clean vehicles.
Solar tax credits
As you expand your childcare business, you may consider incorporating sustainable energy sources into your facility. The solar tax credits are designed to encourage individuals and business owners to invest in renewable energy.
The investment tax credit (ITC) reduces your taxes owed for a percentage of the cost of installing the solar system. This one-time credit is based on the cost of building the system with applicable expenses that include solar PV panels, energy storage devices, and installation costs.
The production tax credit (PTC) is a kilowatt-hour (kWh) tax credit that is calculated based on the electricity produced by your solar system within its first 10 years. These tax credits are earned over time and are ideal for sunny climates.
Tax-Saving Strategies for Childcare Programs
A free tax guide for increasing deductions and minimizing tax liabilities.
Essential tax deductions for childcare business growth
Tax deductions for childcare providers allow you to reduce your amount of taxable income. That means that based on some of the expenses you make, their amount can be deducted from the income you use to calculate your owed taxes. As you work to expand your childcare business, the tax deductions you can claim for your program include:
Facility and operational costs
The ongoing expenses required to maintain a safe and stimulating environment for children are fully deductible. This category covers rent or mortgage interest for the facility, utility bills (electricity, water, gas), business insurance premiums, maintenance and repair costs, and essential cleaning and hygiene supplies. Properly tracking these expenses ensures the full financial benefit is realized.
Equipment and furniture deductions
Investing in the physical environment of a childcare program is crucial for child development and operational efficiency. Expenses related to new playground equipment, classroom furniture, educational toys, or administrative office equipment can be deducted.
Businesses can often claim these costs through depreciation or, for qualifying purchases, utilize Section 179 deductions for immediate expensing, significantly reducing taxable income.
Employee-related expenses
Staff are the heart of any childcare program. All costs associated with employees are generally deductible. This includes salaries and wages, health insurance premiums, contributions to retirement plans, professional development and training costs, and employer-paid payroll taxes. These deductions support attracting and retaining qualified childcare professionals, directly impacting program quality.
Marketing and advertising expenses
To reach new families and grow a childcare business, effective marketing is essential. Expenses for promoting the program, such as website development and maintenance, online advertising campaigns, printing brochures, participating in community events, or professional photography, are all deductible. These investments help expand enrollment and establish your program's reputation.
Professional services and fees
Operating a compliant and well-managed childcare program often requires specialized expertise. Fees paid for legal counsel, accounting services, business consulting, and licensing or accreditation fees are fully deductible. These professional services ensure adherence to regulations, sound financial practices, and overall business stability.
As your childcare program grows, so do your record keeping requirements. With brightwheel’s billing software, administrators can spend less time on record keeping and reporting and more time with children and growing the business. Access reports and billing data to see balances, deposits, transactions, and revenue, and view, download, and print billing and tax statements in seconds.
|
Program Size |
Key Tax Considerations |
Priority Deductions |
|---|---|---|
|
Home daycares |
Home office deduction, business use percentage |
Utilities, supplies, equipment |
|
Small programs (10-40 children) |
Equipment depreciation, staff wages |
Furniture, playground equipment, salaries |
|
Medium programs (40-100 children) |
Employee benefits, insurance |
Health insurance, retirement plans, training |
|
Large programs (100+ children) |
Business structure optimization, multi-location expenses |
Corporate structure costs, management software, facilities |
Tax exemptions to consider for your growing childcare program
Tax deductions and exemptions can be similar, but they are not the same. They both decrease how much money you owe in taxes, but the steps to get there are very different. Deductions lower how much money you owe during tax season, while exemptions help you avoid the tax altogether.
If you are a for-profit business, it’s highly unlikely that your childcare program will receive tax exemptions. There are specific requirements that companies need to satisfy to fit the criteria.
To be considered tax-exempt, your business needs to fall into one of the following organization types:
Organizations that are operated exclusively for educational purposes can become recognized as tax-exempt organizations, but they would have to fulfill other requirements under the IRS Code Section 501(c)(3).
As you expand your childcare program, you may consider converting your business to take advantage of exempt status. Qualifying nonprofit and religious properties are exempt because of the services they offer. For example, church-run childcare centers (i.e., if the property is owned by the organization and is used exclusively for charitable purposes) are exempt from paying property taxes. Consult with a childcare tax professional before making any tax-driven decisions.
FAQs about tax write-offs for daycare providers
What tax write-offs can daycare providers claim?
Daycare providers can claim expenses such as supplies, utilities, food for children, training, and other business-related costs. Make sure to keep detailed records throughout the year.
Can I deduct toys and books for my daycare?
Yes, toys, books, and other materials used for the daycare are considered deductible business expenses.
How do home daycare tax deductions differ from center-based programs?
Home daycare providers can often deduct a portion of their home expenses, such as rent, utilities, and maintenance, based on the percentage of the home used for daycare. Center-based programs typically deduct business-specific expenses only.
When should I hire a tax professional for my childcare business?
If your tax situation feels complex or you're unsure about deductions and compliance, hiring a tax professional can help you maximize savings and ensure accuracy.
Can I deduct my home if I run a daycare?
Yes, if you run a home daycare, you can deduct a portion of your home expenses based on the space and time used for the business.
Tax season doesn’t have to be taxing
Tax season is a reality for every childcare business, but there are opportunities to save. Tax incentives, including credits and deductions, help offset expenses such as facility costs, staff salaries, and business fees—freeing up funds to invest in growth.
No matter your program size, it’s never too late to start building a tax strategy. Using a comprehensive platform like brightwheel and working with a childcare tax professional can help lay a strong foundation for your business expansion.
This article is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual's legal, tax, and financial situation differs, specific advice should be tailored to the particular circumstances. For this reason, you are advised to consult with your own attorney, CPA, and/or other advisors regarding your specific situation.
