Daycare Tax Secrets: Home Office Deduction (Sole Prop) vs. S Corp Accountable Plan

For in-home daycare owners, accurate records can make a meaningful difference in how home-related business expenses are handled.

Tax treatment can differ depending on whether your business is taxed as a sole proprietorship/single-member LLC or as an S corporation.

Option 1: Single-Member LLC Taxed as a Sole Proprietorship

A single-member LLC taxed by default as a sole proprietorship generally reports its business activity on Schedule C. Business-use-of-home expenses may be calculated using the actual-expense method and Form 8829, when applicable, or the simplified method.

The Special Daycare Rule: Time and Space

Daycare providers can qualify for an exception to the exclusive-use rule when they regularly use part of the home for daycare and meet the applicable licensing, certification, registration, or exemption requirements under state law. Shared spaces can therefore qualify when the IRS daycare rules are met.

For actual-expense calculations, the business-use percentage can involve both space and time. For a regularly used but nonexclusive daycare area, the IRS provides a time-use calculation based on the hours the space is used for daycare compared with the total hours available for use. The exact calculation depends on the facts of the home and the year.

What Types of Home Expenses May Be Relevant?

• Rent or qualifying mortgage interest and property taxes, depending on the applicable rules
• Homeowners or renters insurance
• Utilities and other indirect household expenses
• Repairs and maintenance
• Certain direct expenses relating to the business area
• Depreciation when using the actual-expense method and when otherwise required/allowed

The IRS rules distinguish between direct, indirect, and unrelated expenses, and deduction limits can apply. Daycare food expenses are generally handled separately from the home-use calculation.

What About Depreciation and a Future Home Sale?

When depreciation is claimed or allowable for qualified business use of a home, the tax consequences on a later sale can be complicated. Do not assume that depreciation automatically disappears from the sale calculation or that a particular structure will always eliminate recapture. Treatment depends on the property, business use, depreciation taken or allowable, and applicable sale-of-home rules.

Option 2: S Corporation and an Accountable Plan

An S corporation generally does not claim the shareholder-employee’s home-office expenses directly on Form 8829. Instead, an S corporation may use an accountable plan to reimburse qualifying business expenses incurred by its employee-shareholder, provided the plan meets the applicable requirements.

How an Accountable Plan Works

An accountable plan generally requires three things: a business connection for the expense, adequate substantiation within a reasonable period, and return of any excess reimbursement within a reasonable period. Properly substantiated accountable-plan reimbursements can generally be excluded from the employee’s wages and may be deductible by the business when the underlying expense is otherwise deductible.

What Expenses May Be Reimbursed?

Depending on the facts and the plan, an S corporation may reimburse qualifying business-use-of-home expenses supported by appropriate calculations and documentation. The business and shareholder should maintain records showing how the reimbursement was determined.

Whether depreciation should be included in a particular reimbursement arrangement—and how a future home sale could be affected—requires individualized tax analysis.

The Big Takeaway

Both structures can involve legitimate business-use-of-home tax treatment, but the rules and documentation are different. In-home daycare owners should keep consistent records of square footage, daycare-use time, household expenses, receipts, and reimbursement calculations.

Sources & Further Reading

• IRS — Publication 587, Business Use of Your Home
• IRS — Form 8829 Instructions
• IRS — Accountable Plans

Reviewed September 2026. Tax rules can change; use current IRS guidance when making decisions.