Even with preparation, tax season can be a daunting time for childcare providers and small business owners. Careful tax planning ensures that you can take advantage of available deductions while also ensuring that you’ve followed all the instructions to file properly. This guide covers the forms you need, including what you can deduct (which means paying less in taxes) and helps you get your documents in order.
This guide is for anyone who's struggling to sort out their paperwork, for people filing taxes for the first time who have no clue about deductions, and for new business owners who are diving into the tax world for the first time and feeling a bit lost.
When using this guide, be sure to first check out the deadlines for filing your 2023 taxes. Give yourself enough time to get everything you’ll need together. If you're drowning in paperwork, our checklist can help you get organized. For first-timers, we break down what you can deduct so you're not leaving money on the table. And if you're a new business owner, you can use this guide like a roadmap—it'll guide you through the whole process of filing taxes for a childcare center.
How to prepare taxes and what to consider
During preparations for tax season, first decide whether you’ll file your taxes yourself or hire a professional tax preparer or accountant. Before handing over your business information to a tax preparer, make sure they have an active Preparer Tax Identification Number (PTIN) that allows them to prepare, calculate, and file tax returns on behalf of individuals or businesses and receive compensation for their services.
Tax season is all about preparation. At the center of this process are organization and documentation. To prepare for your taxes, you’ll need to keep track of your daycare’s income and expenses. While you can do this at the end of the calendar year, you can save time by categorizing and logging payments and receipts as they come up.
Start as early as possible
Getting a head start on prepping for tax season is an important step when filing your taxes. Gathering all your paperwork early helps to avoid any last-minute chaos, increasing the likelihood that you've got everything you need. This early-bird approach reduces the chances of making mistakes and ensures that you're all set when it's time to file your taxes.
Starting early also gives you the opportunity to discover what deductions and credits are available to you. Tax rules for childcare centers can be a bit tricky, so having extra time to look into deductions—or getting advice from a tax professional—means you won't miss out on potential savings. Being proactive can make a real difference in the money you keep.
Start preparing for tax season at the beginning of the year. This way, you can keep your financial records in check throughout the year. It's a steady approach that makes tax season much less stressful. By staying on top of things year round, you're in good shape to handle tax season like a pro when it rolls around.
Tax preparation checklist
Filing your taxes can be challenging; however, the right checklist can make the process easier. To prepare for your taxes, you’ll need to:
- Find out when your taxes are due
- Gather the appropriate tax forms
- Collect your business income records
- Gather your receipts for business expenses
- Request an extension if needed
Use the list below to compile the necessary documents you’ll need to file.
- Federal tax ID number
- Social security number
- Previous tax returns (up to three years)
- Income statement
- Balance sheet
- Bank and credit card statements
- Bank deposit slips
- Accounting documents
- Grouped receipts:
- Recurring operational costs:
- Subscription-based services
- Transportation expenses
- Advertising and marketing
- Staff training costs
- Professional fees (e.g. accountants, attorneys, and consultants)
- Insurance policies (e.g. individual and group plan documents, company vehicle policies)
- Asset purchase details
- Depreciation schedules
- Payroll reports
- Form 1040: Annual income tax return for individuals
- Schedule C: Sole proprietorships and single-member LLCs
- Form 1065 Schedule K-1: Partnerships and multi-member LLCs
- 1099-MISC: Self-employed business owners
- Form 1120: Corporations and LLCs taxed as corporations
- Form 1120-S: S corporations
Important legal tax obligations for childcare centers
Childcare centers are subject to various federal and state tax requirements. At the federal level, childcare businesses are typically required to obtain an Employer Identification Number (EIN) from the IRS. This unique identifier is used for tax reporting purposes and is essential for opening bank accounts, hiring employees, and meeting other tax-related obligations.
In terms of federal taxes, childcare centers are generally subject to income tax and may need to file an annual income tax return. The nature of this tax liability depends on the legal structure of the childcare center, whether it operates as a sole proprietorship, partnership, corporation, or another form of business entity. Additionally, employment taxes, including Social Security and Medicare taxes, must be withheld and reported for employees.
At the state level, childcare centers are subject to state income tax regulations, which vary by jurisdiction. State requirements may include filing an annual income tax return and complying with specific tax obligations applicable to businesses. Additionally, depending on the state, sales tax may be applicable to certain services provided by childcare centers.
It is crucial for childcare center operators to stay informed about tax regulations at both the federal and state levels, ensuring proper documentation, reporting, and compliance with tax obligations. Seeking professional advice, such as consulting with a certified tax professional or accountant, can be instrumental in navigating the intricacies of federal and state tax requirements for childcare centers and maintaining financial integrity.
Best tax deductions for childcare and daycare centers
The IRS offers childcare providers deductions and credits based on eligibility. Deductions can reduce your taxable income before you calculate the tax you owe, while credits can reduce the amount of tax you owe. In operating a daycare or childcare center, certain business expenses are tax deductible that you can claim when filing your taxes.
Some daycare business expenses that childcare providers are allowed to deduct include the following:
- Supplies: Daycare supplies are tax deductible if necessary to your business operations. These items are generally used for one year, and you need to claim these products during the year of purchase with receipts. Eligible items may include things like crayons, nap mats, and cleaning supplies.
Facility costs: Because it costs money to run a facility, including rent, utilities, and maintenance, this deduction helps to lighten the financial load and ensure a safe environment for children.
- Vehicle expenses: Depending on the number of qualified business miles you drive, you may be eligible to deduct your vehicle expenses. This mileage may include transporting the children in your care on field trips, running errands related to your business, and traveling to and from career-advancing classes. Vehicle expenses may also include any parking fees you paid while doing a business-related activity.
- Capital purchases: Unlike ordinary daycare supplies, capital purchases are items that often last for more than one year. These purchases such as cribs, furniture, and playground equipment, have different rules for claiming than ordinary supplies.
- Meals: Daycare businesses can deduct the cost of meals provided to children. The government provides standard meal rates for breakfast, lunch, dinner, and snacks. These rates will be calculated with attendance and how many meals your daycare provides. Childcare providers also have the option to deduct the actual cost of food if higher than the standard rates; however, documentation is required for all food purchases. Food deductibles don’t include nonfood supplies. These items would be filed under supplies.
- Staff salaries and benefits: Employee payroll is a business expense that is tax deductible. This includes wages, salaries, and employee benefits. This deduction recognizes the costs of wages and benefits for childcare staff and acknowledges the financial investment in the workforce for effective operation.
Educational materials and supplies: Deducting educational materials and supplies includes costs for items like books, toys, and learning aids, essential for creating a stimulating learning environment.
- Business fees: Daycare providers may deduct business-related fees when filing taxes. The types of fees vary; however, they could include childcare licensing fees or dues, legal or accounting fees, and bank fees.
- Depreciation deductions: Depreciation deductions account for the gradual loss in value of assets over time, such as furniture and equipment used in childcare, allowing providers to spread these costs over the assets' useful life.
Other expenses that may be considered tax-deductible for childcare providers include:
- Daycare membership or subscription expenses
- Phone and internet service
- Professional development expenses
Home-based daycare providers can get a tax deduction for using their home. These providers are spared from exclusive use—the space is used solely for business—if licensed, certified, registered, or approved as a daycare provider under state law. If they don’t currently meet these requirements, they must have a pending application as a daycare provider that hasn’t been denied or be exempt from licensing, certification, registration, or approval under state law.
If your daycare can claim business-use-of-home expenses, you can claim some of the expenses used to operate and maintain your home. Deductible expenses may include things like the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, maintenance, and repairs.
Tax credits to consider for 2023 and beyond
A tax credit allows childcare providers to offset their tax liability by deducting a specified amount from their total tax owed. Some childcare providers may also be eligible to claim the below tax credits:
- The Employee Retention Tax Credit: The Employee Retention Tax Credit (ERC) was a policy intended to encourage business owners to maintain their staff during the COVID-19 pandemic. The ERC cannot be claimed on 2023 tax returns (as it only applies to wages paid during 2020 and 2021). However, the IRS allowed amendments to 2020 and 2021 returns to claim the credit if the amendment was filed prior to the immediate moratorium processed by the IRS in September 2023. New claims cannot be filed, though amendments submitted prior to the moratorium will be processed.
- Bonus depreciation: From mid 2017 to the end of 2022, business owners who purchased expensive equipment could claim 100% of the asset’s bonus depreciation in the same year they bought it (this is usually spread out over the life of the equipment). In 2023, this provision is being phased out; therefore, business owners can now claim only 80% of their assets’ bonus depreciation. It will continue to drop by 20% each subsequent year.
- Retirement plans startup costs tax credit: Businesses with up to 50 employees can now claim a tax credit in 2023 for 100% of the cost of starting a retirement plan (up to $5,000). Additionally, business owners can claim a credit for up to $1,000 in employer contributions to each employee’s plan. Note: This credit no longer applies to businesses that employ 51 to 100 employees.
- Energy efficiency renovations: The Inflation Reduction Act of 2022 includes an update to the size of the Energy Efficient Commercial Buildings Deduction, allowing business owners to claim even larger deductions for energy-efficient renovation projects at their facility. Businesses can receive a tax credit covering 30% of the cost of switching over to low-cost solar power, which will help lower operating costs and protect against volatile energy prices. If childcare providers own their building outright, they can receive up to $5 per square foot to support energy efficiency improvements that deliver lower utility bills.
- Commercial Clean Vehicle Credit: Small businesses that use vehicles such as trucks and vans can benefit from tax credits up to 30% of purchase costs for clean commercial vehicles, like electric and fuel cell models that meet applicable requirements.
- Educational assistance programs: Employers who have educational assistance programs can use them to help their employees pay student loan obligations. The option to use these programs to pay student loans is available only for payments made after March 27, 2020, and under current law, will continue to be available until December 31, 2025. Employers may consider setting up educational assistance programs to help attract and retain employees.
Record keeping and documentation best practices for tax preparation
When it comes to taxes, having accurate records is like having a solid foundation for your house. It makes everything easier. You want to be able to show exactly where your money came from and where it went. Clear records help you claim all the deductions you're eligible for and make sure everything adds up correctly.
One of the most important records you’ll need to keep in order are your financial statements. These records show your income, expenses, and overall financial health (which is basically everything the IRS needs to know about your business). Additionally, you’ll need to keep track of any receipts and invoices you’ve collected over the year. Think of them as proof of what you spent money on, whether it's supplies, rent, or other business costs. Having these in order helps you claim all the deductions you can.
With a tool like brightwheel's billing feature, you'll have full access to reports and data in one central place. Pull student transaction summaries, revenue reports, and billing transactions reports that provide further detail on what's seen in the revenue reports.
And don't forget about your employee records. This includes details about how much you pay your staff, any taxes you take out, and benefits you provide. Keeping these records straight is essential for meeting your tax obligations. Maintaining accurate records and having the right paperwork ready sets you up for a smoother tax season, ensuring that you're in compliance and are helping your childcare business stay financially sound.
During tax season, not only will you have to provide your business income and expense information to the government, but you’ll also have families requesting daycare receipts. A childcare or daycare receipt is a document provided to families that totals their childcare payments from January 1 to December 31 of the previous year. Parents and guardians need this information to claim the expense on their taxes and receive a tax credit.
The Child and Dependent Care Tax Credit is a tax break specifically for working people to help offset the costs associated with caring for a child or dependent with disabilities. Rather than a deduction, which reduces the amount of taxable income, this is a tax credit that reduces taxes owed. Families can save hundreds or thousands of dollars by claiming their childcare expenses each year.
Below is a sample template for use by childcare providers created by the IRS:
<Insert Today's Date>
<Insert Parent/Guardian’s Name and Address>
Re: <Insert Child's Name>
To Whom It May Concern:
Our records show we provided service(s) to <Child's Name> at <Name of Care Provider> on the following date(s) <Insert the Date(s) You Provided Service(s) for the Tax Year On the Notice>.
Our records reflect that the child lived at <Street Address, City, State, Zip Code (if the child moved during the year show all addresses)> during this time. Our records also reflect that the child’s parent or guardian during this time was <Insert Parent's or Guardian’s Name(s)>. The child’s parent's or guardian's address of record during this time was listed as <Insert Parent's or Guardian’s Address(es)>.
<Insert Signature of School/Day Care Official>
<Insert Title of School/Day Care Official>
<Insert Phone Number of School/Day Care Official>
To fulfill the rest of this document’s purpose, ensure you include the amount received for the childcare services.
Provide these documents to your families as soon as possible so they have ample time to file their taxes. With brightwheel, families will be notified when their year-end tax statements are available, reducing inbound questions to you and your staff. Families will have a direct link to their statement that they can easily download and it will include all the information they need for tax season.
Compliance with childcare tax regulations in 2023
Childcare providers, whether running for-profit or nonprofit organizations, must be diligent when it comes to licensing and tax compliance. For starters, ensuring that your childcare center is licensed is a must. Licensing requirements vary by state, so check with your local childcare licensing agency to make sure you're abiding by all the rules. Staying on top of licensing not only keeps your center in good legal standing but also influences your eligibility for certain tax benefits.
If you're running a nonprofit childcare facility, you must be familiar with IRS Form 990. This form is like a report card for nonprofits, showing the IRS and the public details about your organization's finances, mission, and activities. It's an annual requirement, and making sure it's filled out accurately and submitted on time is crucial to maintaining your nonprofit status. Take note of any specific instructions or changes in the form each year, as these can impact your reporting.
It’s also essential to stay informed about any recent tax reforms that might affect childcare providers. Tax laws can be frequently updated, and staying in the loop helps you make the most of available deductions and credits. Keep an eye out for any announcements or updates from the IRS or consult with a tax professional to ensure that you're up to date on any changes that might impact your childcare business.
Best tax strategies for childcare centers in 2023
When it comes to tax saving strategies for childcare centers, there are several approaches that can help maximize deductions and minimize tax liabilities.
Small childcare centers
- Deductions for business expenses: Ensure meticulous record-keeping for all business-related expenses, including supplies, utilities, and employee wages. These can be deducted from your taxable income.
- Home office deduction: If the childcare program operates from a portion of the owner's home, consider claiming a home office deduction for a percentage of home-related expenses.
- Section 179 deduction: Small businesses can use Section 179 of the tax code to deduct the cost of certain property as an expense rather than depreciating it over time. This could apply to items like playground equipment or furniture.
Medium childcare centers
- Employee benefits: Explore providing tax-advantaged employee benefits, such as health insurance or a retirement plan. These can be attractive to potential hires and may have associated tax benefits.
- Depreciation: Take advantage of depreciation deductions for significant capital investments, such as building improvements or large equipment purchases.
- Tax planning services: Consider consulting with a tax professional to identify additional tax planning strategies specific to the medium-sized business structure.
Large childcare centers
- Business structure optimization: Evaluate your business structure for tax efficiency, considering options like becoming an S corporation or limited liability company (LLC) for potential tax benefits.
- Research and development credits: For larger daycare centers investing in curriculum development or innovative programs, research and development tax credits might be applicable.
- Charitable contributions: If the childcare center engages in community outreach or supports charitable causes, explore potential tax benefits associated with these activities.
- International tax considerations: If the childcare center has an international presence, seek advice on managing tax implications related to global operations.
- Tax-advantaged investments: Explore tax-advantaged investment strategies for surplus funds, potentially through tax-exempt bonds or other investment vehicles.
Tax filing deadlines
Although April 15 is often recognized as national tax day, businesses may have different deadlines based on their structure. Below you’ll find the filing deadlines, outlined by the IRS, for the following business types: sole proprietor, partnership, S corporation, and corporation.
A sole proprietor is someone who owns an unincorporated business by themselves. If you’re the sole member of a domestic limited liability company (LLC), you aren’t a sole proprietor if you elect to treat the LLC as a corporation.
Tax filing deadline: The 15th day of the fourth month following the end of the tax year—generally April 15.
A partnership is a relationship between two or more people to do trade or business. Each person contributes money, property, labor, or skill and shares in the profits and losses of the business.
Tax filing deadline: The 15th day of the third month following the end of the tax year—generally March 15.
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. The shareholders report the income and losses on their personal tax returns, and taxes are assessed at their individual income tax rates.
Tax filing deadline: The 15th day of the third month following the end of the tax year—generally March 15.
A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders. In forming a corporation, prospective shareholders exchange money, property, or both for the corporation’s capital stock. Corporation profits are taxed when earned and then taxed to shareholders when distributed as dividends.
Tax filing deadline: The 15th day of the fourth month following the end of the tax year—generally April 15.
When a tax filing due date falls on a weekend or legal holiday, the due date is extended to the next business day. The 2023 filing deadline for partnerships and S corporations is March 15, 2024. Sole proprietors and corporations must file their taxes by April 15, 2024.
When preparing for tax season, childcare business owners must carefully consider several key factors to ensure a smooth and compliant process. First and foremost, maintaining detailed records of income and expenses is crucial for accurate reporting. It's also equally important to understand the specific tax deductions and credits available, such as those related to childcare expenses and business-related costs.
Seeking professional assistance from tax specialists or accountants who specialize in the childcare industry can provide invaluable guidance and ensure compliance with all relevant tax laws. By prioritizing organization, knowledge, and expert support, you can navigate tax season confidently and optimize your financial outcomes.
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.