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There are many paths to expanding a childcare business. While there isn’t one foolproof plan for growth, for every challenge, there’s an opportunity. Growing your workforce gives you the chance to hire skilled childcare providers. Attracting new families creates the opportunity to build a diverse program and increase brand awareness.
Boosting enrollment and building and investing in your employees are big expenses, but they’re crucial to growing your childcare business. And while most business owners dread tax season, creating a strategy and understanding tax incentives like credits and deductions can help you save money on business expenses and promote sustainable growth.
Taking advantage of tax write-offs can help your daycare business save thousands of dollars for growth and expansion. Use this guide to learn ways to grow your childcare business and how you can use your taxes to do it.
Ways to grow your childcare business
Growth is an obvious goal for childcare business owners who hope to build a successful childcare program. At the end of the day, the best strategy for growth is to increase revenue, but how does one do that? The answer usually lies in enrollment. Boosting enrollment and the number of children in your program directly affects the growth of your business and, ultimately, its success and longevity. Two ways you can focus on expansion are through facility expansion and service diversification.
Facility expansion is the physical expansion of your existing facility. This lets you increase the area where you offer your childcare services. You can expand your business in several ways: increase the space in your current facility, move to a bigger space, or open a new location. More space means more enrollment opportunities, which equals more growth and success.
Most childcare programs offer the same services to their families—childcare during regular business hours. Unfortunately, this isn’t enough for the families whose jobs and lives don’t run on the typical 9 to 5 schedule. Service diversification lets your business expand its offerings and meet families where they are. This helps you care for a broader group of children whose families can benefit from the extra services. Ideas for service diversification could include:
- Half-day schedules for AM or PM only care
- Drop-in care for non-regular clients
- After-school care
While growing your childcare business can increase revenue, it can be a challenge, not only in your efforts but also in your expenses. Fortunately, tax incentives can help alleviate some of the challenges, specifically the costs and financial burden associated with growing every type of childcare business.
Home daycares
In-home childcare providers don’t have as much room for growth as other childcare programs. Home-based programs are often limited in the amount of children allowed to be in your care (typically less than 10 children depending on your location). This makes it difficult to grow by boosting enrollment because there is a cap. These programs can grow by offering more services to families, but this quickly correlates to more expenses on supplies and staff.
Home-based childcare providers are also at the whims of the housing market. With affordable housing options becoming harder to find, you’re left to deal with high rent and mortgage rates. Because home-based programs operate in the provider’s home, there are specific daycare business tax deductions that apply to you. For example, when you operate your business inside your home, you can take advantage of home office deductions. This lets you claim deductions for home-related expenses that are tied to business operations.
Small daycares
For small center-based childcare programs (which we’re defining as having 10 to 40 children enrolled), an increase in enrollment will typically increase revenue and your expenses. The recommended staff-to-child ratio for preschool aged children is one adult for every seven to eight children. If you increase enrollment from 14 to 15 children, you’d have the financial expense of hiring another provider. More children also means more supplies and equipment because while 20 books for a facility of 10 might be appropriate, this wouldn’t be the case for a program with 40 children.
Directors can maximize tax write-offs for daycare operations on certain properties like playground equipment and furniture. This lets you deduct the full cost of eligible equipment (in the year you bought them) and reduce your taxable income.
Medium daycares
For a medium-sized childcare program (which we’re defining as ranging from 40 to 100 children), you’d need at least 14 childcare providers to maintain ratio requirements for 100 preschool-aged children. And while you might not be legally obligated to offer health insurance to your staff, healthcare is non-negotiable for a majority of the workforce. As your business grows, employee benefits become expected, especially as you work to attract new teachers or prevent turnover with your current employees.
Offering employee benefits such as health insurance and retirement plans can be a large business expense; however, employee wages, salaries, and benefit expenses are tax deductible.
Large daycares
You might’ve started your daycare business by filing taxes as a sole proprietor. With large daycares with hundreds of children and dozens of employees, you’ll likely change your business structure. As previously mentioned, the price of expanding a childcare business includes more expenses on supplies and furniture as well as employee salaries and benefits. However, becoming an S corporation or a limited liability company (LLC) can provide certain tax benefits.
For example, S corporations can reduce your self-employment taxes, but it can cost you more than it saves. Filing childcare business taxes can be very nuanced, so finding a knowledgeable tax professional can help maximize your savings as you expand and grow your business.
Get help: Finding tax professionals that specialize in childcare center tax services
Handing all your financial information over to a stranger can be anxiety-inducing, but there’s one certain thing—no one knows childcare tax laws better than a childcare tax professional.
Hiring a tax professional can help you:
- Save money
- Save time
- Avoid common tax errors
- Decrease risk of tax audit
- Create tax strategy
While all tax professionals can help you take advantage of these benefits, accountants specializing in childcare center taxes know all the rules and regulations that affect childcare businesses. This includes knowing the rules of depreciation and asset write-off options available to childcare center owners. Childcare-focused tax professionals know whether you can claim replacing a bookshelf as part of your home-based daycare business operations.
With the help of software like brightwheel, filing taxes can be even easier for you and your tax professional. The system integrates with Quickbooks to provide your accountant with all the information they need to file your company’s taxes. Ultimately, sourcing your tax filings out to professionals can help you save time while finding and taking advantage of tax credits, deductions, and exemptions that can help propel your business as you focus on expansion.
Top 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.
Best deductions for childcare business expansion
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 costs
Childcare expansion translates into more enrollment, more business, and more expenses. Depending on how you expand, you’ll need to consider facility costs and how they affect your taxable income.
If you choose to expand your space or open a new location, you’re looking at more utility expenses like electricity, heat, and water. If you diversify your services to include early morning or evening care, you need to cover paying your employees for the extra time. Fortunately, the cost to run and maintain a facility, including rent and utilities, is tax deductible.
Supplies
As you work to expand your childcare business, your list of supplies grows as your business grows. The cost of daycare supplies and materials can be deducted from your taxes as long as they were purchased and used during the tax year. This includes paper, pencils, and art supplies. Books can be deducted if you use them within the year, but they can fall into a special category.
According to the IRS, “if the usefulness of these items extends substantially beyond the year they are placed in service, you must generally recover their costs through depreciation.”
Commonly used for capital expenses—which we’ll discuss shortly—depreciation is a process of recovering the cost of a purchase by deducting part of the cost annually until the full amount is recovered.
Capital purchases
Capital purchases are large purchases that are expected to last longer than a year such as items like furniture, playground equipment, or computers. They can even include the cost of training employees. At first glance, capital expenses may not seem as if they work towards boosting your expansion efforts, but they do. Buying more classroom equipment and employing qualified childcare providers are capital expenses that are part of a successful expansion strategy. These expenses are considered assets to your business.
Capital expenses are different from regular childcare supplies that get replaced regularly, like crayons or cleaning products. These large purchases can be deducted from your taxable income, but they’re handled differently than simpler classroom supplies. For some capital expenses, the cost can be deducted during your annual filing. Generally, capital expenses are recovered through depreciation by deducting part of the cost each year.
Staff salaries and benefits
Your expansion efforts will require you to hire more staff. The cost associated with paying your employees is tax deductible. This covers hourly wages, salaries, and employee benefits like health insurance, paid vacation, and life insurance.
Business fees
Running a childcare program comes with many business fees. As your business grows, you might find yourself employing the services of an accountant to help with your taxes. If your enrollment grows, you might be required to pay more for childcare licensing fees. Legal or accounting fees, licensing dues, and bank fees can all be deducted from your taxes.
Advertising
If you’re offering more services or opening a new location, how can you let current families or potential newcomers know? You’ll need to advertise. Advertising and marketing costs are considered business expenses and can be deductible from your income. Examples of tax-deductible advertising expenses include designing a new website, printing new business cards, or buying and circulating digital ads.
While most of the above deductions have tangible value, your childcare business can also take advantage of intangible assets. Intangible assets are property that have value but can’t be seen or touched. For example, some of your advertising and marketing expenses could be intangible assets. This can include intellectual property, like a design logo you had created for your business. Intangible assets also include trademarks, copyrights, and patents—long-term assets that bring value to your childcare program. The expenses you pay for childcare training are also considered intangible assets because you can’t see or feel the knowledge they gain.
Manually keeping track of all your business’s tangible and intangible expenses is next to impossible; however, knowing what they are can reap major benefits for your program. As your childcare center grows, there are even more payments and expenses to record. 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.
Tax exemptions to consider for your growing childcare center
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.
Think of it as going to a restaurant where Person A has a coupon that says they don’t have to pay for food, while Person B doesn’t have to pay for going to restaurants. At the end of the dining experience, Person A receives a bill with food, and their coupon will have the food deducted from their bill. Person B doesn’t receive a restaurant bill at all. That’s the difference between exempt and non-exempt companies.
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 facility, 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.
To reiterate our earlier point, tax laws are very nuanced. Consult with a childcare tax professional before making any tax-driven decisions.
Tax season doesn’t have to be taxing
Tax season is unavoidable. As a business owner with plans of expansion, it’s easy to feel anxiety and dread because no one wants to be met with thousands of dollars in tax payments. Fortunately, all types of childcare facilities, from home-based programs to large centers, can benefit from tax incentives.
Tax credits and deductions help offset the cost of running your childcare business. They can help you save money after paying facility costs, staff salaries, and business fees—money you can put towards your goal of growing your business. It’s never too late to start your tax strategy. With a comprehensive platform like brightwheel and the help of a childcare tax professional, you can lay the groundwork for your childcare 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.
