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As a childcare provider, it's essential to not only focus on the children's well-being but also understand the financial aspects of your business. One crucial aspect is understanding the deductions available to you as a childcare business owner. By taking advantage of these deductions, along with understanding the rules for depreciation and write-offs, you can maximize your tax benefits and keep more of your hard-earned income.
In this article, we’ll discuss how to depreciate equipment, furniture, and other assets to reduce your tax liability and maintain financial stability.
Understanding childcare business depreciation and tax write-offs
As you prepare your center for tax season, it’s important to understand the depreciation rules and asset write-off options available to childcare business owners.
The IRS defines depreciation as “an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.” The overall purpose of depreciation is to account for an asset’s drop in value over time. If a depreciation expense is larger, then the taxable income is lower. So, it is beneficial to your business to properly calculate depreciation, because a lower taxable income can lower your tax bill.
For an asset to be considered depreciable property, it must:
- Be property you or your business owns
- Be used in a business or income-producing manner
- Have a determinable useful life
- Be expected to last longer than one year
- Not be excepted property
There are four different methods of depreciation commonly used by businesses, each with its own unique approach. The method that works best for your center will depend on the size of your facility and the types of assets you acquire for it. Your level of experience with doing business taxes may also impact which method you choose. The four depreciation methods are:
- Straight-line depreciation
- Declining balance depreciation
- Sum-of-the-years’-digits depreciation
- Units of production depreciation
Straight-line depreciation
Straight-line depreciation is the most common and straightforward method. It evenly distributes the cost of an asset over its useful life. For example, if a childcare center purchases a playground for $10,000 with an estimated useful life of 10 years, they would depreciate it by $1,000 per year ($10,000 / 10). This method is ideal when an asset's value decreases evenly over time.
The declining balance method
The declining balance method, also known as accelerated depreciation, allows businesses to deduct larger amounts of depreciation in the early years of an asset's life. This method assumes that an asset is most valuable in its early years. In the childcare industry, this method may be relevant for assets such as computer equipment or specialized teaching tools, which may become outdated more quickly than other assets.
The sum-of-the-years’ digits method
The sum-of-the-years'-digits method is another accelerated depreciation method. It takes into account the number of years remaining in an asset's useful life. The depreciation expense decreases each year, reflecting the declining usefulness of the asset. In the childcare industry, this method could be relevant for assets like furniture or appliances that may require replacement due to wear and tear before their estimated useful life is complete.
The units of production method
The units of production method calculates depreciation based on the actual usage or production of an asset instead of time. This approach is suitable for assets whose usage varies significantly. For instance, a van used to transport children might be depreciated based on the number of miles driven or the number of hours the van is in use.
How to manage depreciation and expense
Proper depreciation management is a great way for your childcare business to keep expenses under control. Running a business can be unpredictable, so giving your childcare center as much financial leverage as possible is important for stability. Doing depreciation properly can help you to account for larger depreciation expenses so your taxable income is lower and less has to come out of your business’ revenue when it’s time to pay your business taxes.
Whether you are new to doing your business taxes as a childcare provider or you are a long-time center owner, using tools and software is always helpful. With brightwheel’s billing tool you’ll have access to the perfect features to make billing, tracking, and reporting efficient and to make tax season as smooth as possible.
Focusing on how your childcare center handles budgeting, maintenance, and strategic asset planning is another strategy you can use for managing depreciation. Budgeting for your childcare business is more than just tracking expenses and income; it’s also anticipating new expenses before they occur, accounting for variable costs, and not being afraid to adjust. Making the right decisions to maintain your childcare business’ financial stability is important for tax season and all year long.
2023 depreciation list for childcare centers
Keeping detailed records of equipment, including its cost, changes to its condition or usability, associated maintenance or repairs, and frequency of use, is the most efficient practice for calculating depreciation.
Here is a list of the most common equipment and assets that are subject to depreciation for childcare facilities:
- Buildings
- Playground equipment
- Machines and appliances
- Vehicles
- Furniture
- Computer equipment and software
For some methods of depreciation, you’ll need to have an estimate of the likely useful life of the assets. Playgrounds, for example, typically last about 10 years if they are properly maintained. Furniture, on the other hand, is likely to last only a few years, depending on which are for children and which are for staff.
Top asset write-offs for childcare centers
Asset write-offs play a crucial role in reducing taxable income for childcare businesses. By taking advantage of these deductions, childcare center owners can minimize their tax liability and allocate more resources towards providing quality care for children.
An asset write-off allows businesses to deduct the cost of qualifying assets over time. Instead of deducting the entire purchase cost upfront, the expense is spread out over the useful life of the asset. This gradual deduction helps align the expenses with the benefits received from the asset. It effectively reduces the taxable income and provides financial relief for childcare center owners.
Examples of asset write-offs in the childcare industry
- Furniture and equipment: Childcare centers often invest in furniture, such as tables and chairs, and equipment like cribs or playpens. These assets have a definite lifespan and can be depreciated over time, allowing for a write-off of their purchase cost.
- Computers and software: Technology plays a vital role in childcare operations, including record keeping, communication, and educational programs. Computers and software purchases, along with related expenses such as printers or licenses, can be written off over their useful life.
- Vehicles for transportation: If a childcare center provides transportation services for children, vehicle-related expenses can be written off. This includes not just the purchase cost of the vehicle but also ongoing expenses like fuel, maintenance, insurance, and depreciation.
- Improvements and renovations: Making improvements to the physical space of the childcare center, such as adding new rooms, renovating play areas, or upgrading security systems, can be written off over time as capital improvements.
Available options for asset write-offs
Childcare center owners have several options for asset write-offs, including:
- Section 179 deduction: This allows businesses to deduct the full cost of qualifying assets in the year they are purchased, up to certain limits. It provides immediate tax relief and is particularly beneficial for smaller businesses.
- Bonus depreciation: This allows businesses to deduct a percentage of the cost of qualifying assets in the year of purchase, on top of regular depreciation deductions. It offers additional tax savings and can be advantageous when significant investments are made.
It's important to consult with a tax professional or accountant who specializes in business taxation to determine the most suitable asset write-offs for your specific circumstances. Properly utilizing these deductions can significantly reduce taxable income, providing financial flexibility and resources to enhance the quality of care offered by childcare businesses.
Managing the business of childcare
Whether you're a seasoned home daycare owner or just starting your business, it's important to understand the deductions that can help save you money come tax season. By honing your knowledge in these areas and working with a tax professional, you can optimize your tax benefits, save money, and ensure the continued growth and success of your childcare business.
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.
