No Home Office Deduction for Unlicensed Daycare Provider

Usually, in order to deduct home office expenses for conducting a business at home, the space for the office must be used regularly and exclusively for business. However, special rules apply for figuring a home office deduction by a daycare provider. The usual exclusive use requirement that a portion of the home be used solely for business does not apply; children may use many areas of the home that are also used by the provider’s family for nonbusiness purposes.

In order to qualify for any home office deduction, a daycare provider must meet state licensing requirements. In one recent case, a daycare provider who regularly cared for five to six children in her home failed to obtain a state license because she didn’t know she needed one. State law (Illinois) requires licensing for anyone providing daycare services to more than three children (including the provider’s children) under the age of 12.

Note: The fact that the taxpayer claimed home office deductions in earlier years and these deductions were not disallowed does not change the results. The fact that she escaped audit was her good fortune for those earlier years.

Source: Lori A. Malchow-Bartlett; T.C. Memo. 2010-271