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IRS Revenue Ruling 92-3 |
January 21, 1992
Part 1. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 262.-Personal, Living, and Family Expenses
If a taxpayer provides day care in the taxpayer's home, are the costs of basic local telephone service for the first telephone line provided to the home and other substantiated telephone charges deductible under section 262(b) of the Code. See Rev. Rul. 92-3, below.
Section 280A - Disallowance of Certain Expenses in Connection with Business Use of a Home, Rental of Vacation Homes, etc.(Also Section 262.) Calculation of the deduction for the business use of a home by day care providers. A day care provider should compute the amount of the deduction by treating a room as used for day care for the entire business day if it is available for day care use for the entire day and is regularly used for day care.
Issue
How should a day care provider compute the amount of the deduction provided under section 280A of the Internal Revenue Code for the business use of the provider's home for day care during a taxable year?
Facts
A, an individual, operates a full-time day care facility in A's home in state M. A is a licensed day care provider under the laws of M. A's day care business is regularly operated 11 hours each day (from 7 a.m. to 6 p.m.), 5 days a week, 250 days a year. During these business hours, A provides day care for several young children other thank A's children. Some children arrive at K's home for day care at 7 a.m., and some do not leave As home until 6 p.m. At any particular time during K's business day, A has at least 1 child (other than A's children) in A's home for day care.
The total floor area of A's home is 1,600 square feet. Although no rooms in A's home are used exclusively for A's day care business, several rooms in A's home are available for day care use throughout the business day and are regularly so used as part of A's routine provision of day care. The total floor area of these rooms is 1,200 square feet. In addition, A spends one-half hour before and one-half hour after regular business hours preparing for and cleaning up after the children.
In addition to interest and taxes of $5,000, A, a calendar year taxpayer, incurred $4,000 of costs during 1991 for electricity, gas, water, trash collection, general maintenance, and insurance with respect to the use of A's home for day care and as a personal residence. The total depreciation for A's home during 1991 (determined under sections 167 and 168 as though the entire home were depreciable) was $1,000. Thus, A's total costs for 1991 were $10,000. A's home has only one telephone line and A pays a monthly charge of $20 for basic local telephone service. The laws of M require A to have a telephone in order to be licensed by M to provide day care. A uses the telephone for both business and personal calls.
A has adequate records to substantiate the $10,000 of costs, the number of hours and days that A's day care business was operated (including preparation and clean-up time), the number of children for whom A provided day care, and A's telephone costss.
Law and Analysis
Section 28OA(a) of the Code provides generally that in the case of a taxpayer who is an individual or an S corporation, no deduction otherwise allowable shall be allowed with respect to the use of a dwelling unit that is used by the taxpayer during the taxable year as a residence.
Under section 28OA(b), subsection (a) shall not apply to any deduction otherwise allowable to the taxpayer without regard to the deductions connection with the trade or business (for example, the deduction for qualified residence interest under section 163 and the deduction for state and local real property taxes on a personal residence under section 164). Section 280A (c) (4) (A) of the Code provides, in part, that subsection (a) shall not apply to any item to the extent that the item is allocable to the use of any portion of the dwelling unit on a regular basis in the taxpayer's trade or business of providing day care.
Section 28OA(c) (4) (B) of the Code provides, in part, that paragraph (a) shall apply only if the owner or operator of the trade or business has applied for, has been granted, or is exempt from having a license, certification, registration, or approval as a day care center or as a family or group-day care home under the provisions of any applicable state law.
Section 28OA(c) (4) (C) of the Code provides, in part, that if a portion of the taxpayer's dwelling used in the day care business is not used exclusively for day care purposes, the amount of expenses attributable to that portion shall not exceed an amount that bears the same ratio to the total amount of the items allocable to such portion as the number of hours that portion is used for such purposes bears to the number of hours the portion is available for use.
Section 28OA(c) (5) of the Code, in part, limits the section 28OA(c) (4) deduction for day care expenses to the excess of the gross income derived from the day care business over the otherwise allowable deductions allocable to the day care business (e.g., interest and taxes) and the deductions allocable to that business that are now allocable to the use of the dwelling (e.g., food and supplies). Section 262(b) of the Code provides that, in the case of an individual, any charge for basic local telephone service with respect to the first telephone line provided to any residence of the taxpayer shall be treated as a nondeductible personal expense.
In computing the deduction for a taxable year under section 280A (c) (4) of the Code for the business use of A's home to provide day care, A should multiply the total costs incurred during the year with respect to A's home ($10,000) by two fractions. (If A rented rather than owned A's home, the amount of rent paid in 1991, rather than the depreciation, mortgage interest, and real estate taxes would be included in the costs incurred.) The first fraction is the total square footage in A's home that is available for day care used throughout each business day and that is regularly so used in that business, divided by the total square footage of A's home. The second fraction is the total hours in the year that the day care business is operated (including substantiated preparation and clean-up time), divided by the total number of hours in a year (8,760 hours). If a room is available for day care use throughout each business day and is regularly used as part of A's routine provision of day care (including a bathroom, an eating area for meals, or a bedroom used for naps), the square footage of that room will be considered as used for day care throughout each business day. A day care provider is not required to keep records of the specific hours of usage of such a room during business hours. Also, the occasional nonuse of such a room for a business day will not disqualify the room from being considered regularly used. However, the occasional use of a room that is ordinarily not available as part of the routine provision of day care (e.g., a bedroom ordinarily restricted from care use but used occasionally for naps) will not be considered as used for day care throughout each business day.
Thus, except as limited by section 28OA(c) (5) of the Code, A's may deduct under section 28OA(c)(4) $2,568.49, which represents the portion of the $10,000 in expenses attributable to A's use of 1,200 square feet of A's home for day care for 3,000 hours (12 hours per day for 250 days) during 1991. The computation of the $2,568.49 day care deduction is as follows: (1200/1600) x (3000/8760) x $10,000 = $2,568.49. The non-business portion of the otherwise deductible interest and taxes may be claimed as an itemized deduction.
Under section 262 (b) of the Code, A's $20 monthly expense for basic local telephone service is a nondeductible personal expense, even though the state requires A to have a telephone in order to be a licensed day care provider. Additional telephone charges incurred for business purposes are deductible under section 162 to the extent substantiated.
Holding
A day care provider should compute the amount of the deduction for a taxable year provided under section 280A of the Code for the business use of a home for day care by multiplying the total costs incurred during the year that are allocable to the use of the home by two fractions. The first fraction is the total square footage in the home that is available for day care use throughout each business day and that is regularly so used in that business, divided by the total square footage of the home. The second fraction is the total hours in the year that the day care business is operated (including substantiated preparation and clean-up time), divided by the total number of hours in a year. This deduction is limited as provided in section 280A (c) (5).In addition, pursuant to section 262(b), no deduction is allowed for the cost of basic local telephone service for the first telephone line provided to the home.
Drafting Information
The principal author of this revenue ruling is Cynthia A. Davis of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Davis (202-566-4177).
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