I.R.S. Clarifies Taxation Policy for Home Day-Care Providers

By Deborah L. Cohen — January 15, 1992 2 min read

WASHINGTON--The Internal Revenue Service has issued a ruling making it clear that day-care providers who operate at home do not have to track how much time each child spends in each room every day in order to claim a business deduction on their federal income tax returns.

For many years, so-called “family day-care” providers have been calculating business deductions based on a “time-space formula” that factors in the percentage of total square footage of the home used and the number of hours it is used for child care on a regular basis.

But last April, responding to questions that arose in the audit of a provider in St. Paul, Minn., the I.R.S. issued a “technical advice memorandum” suggesting that home daycare operators must be prepared to show how much time children spend in each room per day. (See Education Week, April 24, 1991 .)

That interpretation sparked concern from day-care providers who contended it would create a record-keeping “nightmare,” could compromise the time providers spend interacting with children, and could compel some to leave the profession or operate without a license.

Since the memorandum surfaced, at least three bills have been introduced in the Congress seeking to reverse its effect.

However, the new ruling, IR-92-1, makes it clear that, “if a room is available throughout the business day and is regularly used for day care, the square footage of that room will be considered as used for day care for the entire business day.”

For example, an I.R.S. statement on the ruling explained, a provider could factor in the square footage of a bedroom regularly used for children’s naps and claim it as a business deduction, even if the room is “not used during every hour of the business day.”

A ‘Big Victory’

‘This new rule eliminates the need for a day-care provider to keep records of the specific hours of business use of that room,” the I.R.S. said.

“It’s great for day-care providers,” said Carol C. Ploeckelmann, the St. Paul provider whose tax preparer’s query in a 1990 audit ruling prompted the earlier I.R.S. memorandum.

“We don’t have to run around with a clipboard from room to room to keep track of who is in what room at what hour,” she said.

Ms. Ploeckelmann, who estimated that the earlier interpretation would have cost her from $600 to $700 a year, said the ruling would allow her to continue to operate without raising rates for parents.

“I won’t have to charge extra to make up for the tax I’m losing,” she said.

The ruling is “exactly how we would want it phrased,” said Tom Copeland, an information specialist for Resources for Child Caring, a nonprofit group based in St. Paul that provides child-care referral and training services as well as tax information for providers.

“It’s the opposite of the earlier memo--it’s a really big victory,” said Mr. Copeland, who called the ruling “the most comprehensive explanation or clarification the I.R.S. has ever made about the time/space point.”

While it is not binding and does not have the force of law, Mr. Copeland said, the ruling carries more weight than an advice memorandum, which technically applies only to a particular case.

Representative Patricia Schfoeder, the Colorado Democrat who chairs the House Select Committee on Children, Youth, and Families, had frequently criticized the approach taken in the earlier memorandum,

“I am delighted that the I.R.S. listened to the concerns voiced by members of Congress and family day-care providers and crafted a new ‘family-friendly’ policy that recognizes the reality of family day care businesses,” she said in a statement last week.

A version of this article appeared in the January 15, 1992 edition of Education Week as I.R.S. Clarifies Taxation Policy for Home Day-Care Providers