2018 tax changes that affect family child care providers

Last updated 2026-07-09

What is the Tax Cuts and Jobs Act and why does it matter for home daycare?

The Tax Cuts and Jobs Act of 2017 (TCJA, Public Law 115-97) was signed on December 22, 2017, and took effect for tax year 2018. It was the largest rewrite of the U.S. tax code since 1986. For most employees, the changes were mostly automatic. For family child care providers, they were anything but, because home daycare operators are self-employed business owners, and the TCJA changed a lot of the rules that govern self-employment income, deductions, and business structure. ^[1]

Most family daycare providers operate as sole proprietors. Their business income flows onto Schedule C and then onto their personal Form 1040. The TCJA touched nearly every part of that return: it created a new 20% deduction for pass-through business income, it nearly doubled the standard deduction, it eliminated personal exemptions entirely, it raised the Child Tax Credit, and it kept the Child and Dependent Care Credit essentially unchanged. Each of those moves has real consequences for how you run your books.

One thing the law did not change: family child care providers are still self-employed, still owe self-employment tax on net profit, and still calculate the Time-Space percentage the same way to allocate home expenses. The foundation of Tom Copeland's method, which the IRS has accepted for decades, still applies. ^[2] What changed is which deductions are now worth chasing and which matter less than they used to.

What is the Section 199A pass-through deduction and do home daycare providers qualify?

This is the biggest new dollar opportunity in the TCJA for family child care providers. Section 199A lets owners of pass-through businesses (sole proprietorships, S-corps, partnerships, some LLCs) deduct up to 20% of their qualified business income (QBI) from taxable income. If your net profit from daycare is $40,000, you may be able to subtract $8,000 from taxable income before the IRS calculates what you owe. ^[1]

Family child care providers generally qualify. The IRS issued final regulations under Section 199A in January 2019 (Treasury Decision 9847). Child care is not listed as a Specified Service Trade or Business (SSTB), the category that faces phase-outs at higher income levels. SSTBs include law, health, consulting, and financial services. Child care is not on that list, so even higher-earning providers are not automatically excluded the way a physician or attorney would be. ^[3]

Income thresholds still matter. For 2018, the deduction begins to phase in limits above $157,500 for single filers and $315,000 for married filing jointly. Below those thresholds, the math is straightforward: your deduction is 20% of QBI, capped at 20% of your taxable income (not counting net capital gains). Above them, W-2 wage and property limitations kick in. Most sole-proprietor home providers fall well below the phase-in range, so the simpler calculation applies.

You take the deduction on Form 8995 (for most providers, the simplified version). It reduces your taxable income but not your self-employment tax base. ^[9] That last part is frustrating but real. You still pay self-employment tax on the full net profit. The Section 199A deduction only cuts the income tax portion of your bill.

How did the nearly doubled standard deduction change the math for home daycare deductions?

For 2018, the standard deduction jumped to $12,000 for single filers and $24,000 for married filing jointly, roughly double the 2017 amounts. This is where a lot of home providers got confused, because the standard deduction and business deductions live in completely different places on your return. ^[11]

Your home daycare business deductions (mortgage interest allocated by Time-Space, utilities, food, supplies, depreciation) all sit on Schedule C, which reduces your self-employment income before you ever reach the standard-versus-itemized decision. The standard deduction only replaces itemized deductions on Schedule A: the non-business portion of mortgage interest, state and local taxes (now capped at $10,000), and charitable contributions.

So the higher standard deduction does not touch the value of your Schedule C business deductions. What it does is make Schedule A itemizing less worthwhile for most home providers, because you now need more than $12,000 (or $24,000 if married) in qualifying personal deductions to beat the standard amount. For providers who itemized before to deduct the non-business share of mortgage interest, that share now often gets swallowed by the standard deduction anyway.

The practical result is simple. Double-check that you are capturing every legitimate Schedule C deduction, because those still reduce both income tax and self-employment tax. Schedule A deductions only reduce income tax, and many providers will no longer itemize at all under the new thresholds.

What happened to personal exemptions, and how does that hurt providers with kids at home?

The TCJA eliminated personal exemptions starting in 2018. In 2017, each exemption was worth $4,050 per person, so a married couple with two children had $16,200 in exemptions reducing their taxable income. Starting in 2018, that number went to zero. Gone. ^[1]

The law partially offset this by raising the Child Tax Credit from $1,000 to $2,000 per qualifying child and making $1,400 of it refundable (up from $1,000). The income phase-out threshold also rose sharply, to $200,000 for single filers and $400,000 for joint filers. Many families with children came out even or ahead on net. ^[1]

But for a home provider who is single with no dependent children, or whose children are over 16 and no longer qualify for the Child Tax Credit, losing personal exemptions is a straight tax increase that the higher standard deduction may or may not fully offset. Nobody should assume the new rules are automatically better for them without running the actual numbers.

Did the Child and Dependent Care Credit change under the TCJA?

No. This is one of the few areas the TCJA left alone. The Child and Dependent Care Credit is still a nonrefundable credit of 20% to 35% of up to $3,000 in qualifying expenses for one child (or $6,000 for two or more), depending on your adjusted gross income. The maximum credit is $600 for one child or $1,050 for two or more at the lowest income levels. ^[4]

This matters for family child care providers in two ways. If you personally pay for child care for your own children while you run your business, you may still claim this credit. And the families you serve claim this credit based on the payments they make to you, which is why your EIN or Social Security number and year-end payment statements matter so much for your clients.

The credit did not become refundable under the TCJA, so it only helps providers who owe federal income tax. Low-income providers with little or no tax liability get nothing from it. There was a proposal during TCJA negotiations to expand the credit, but it did not make it into the final law.

For a broader look at how the credit works for the families you serve, see our article on the childcare tax credit.

How does the Time-Space percentage calculation work, and did the TCJA change it?

The Time-Space percentage method is how the IRS lets home daycare providers split shared household expenses (mortgage or rent, utilities, insurance, repairs) between personal and business use. The formula: (hours your home is used for daycare per year) divided by (total hours in a year, 8,760) multiplied by (square footage used for daycare) divided by (total home square footage). The result is your Time-Space percentage. ^[2]

The TCJA did not change this calculation. IRS Publication 587 still governs it, and the method Tom Copeland has documented for the National Association for Family Child Care (NAFCC) still applies. ^[2][10] What changed is the downstream tax value of the deductions you generate, because Section 199A and the shift in itemized deductions affect how much those Schedule C write-offs ultimately save you.

A few things that have not changed are worth knowing. Time spent on daycare-related activities in your home even when children are not present (planning, cleaning, record-keeping) still counts as daycare hours. Spaces used exclusively for daycare can be counted at 100% business use without applying the Time-Space formula to them. Depreciation on the home is still available and still triggers depreciation recapture when you sell.

Depreciation recapture did not change under the TCJA for residential property. When you sell your home after claiming depreciation through daycare use, the depreciated amount is taxed at a maximum 25% rate as unrecaptured Section 1250 gain. Providers get surprised by this all the time, and the TCJA did nothing to soften it.

What changed for home office and business asset deductions?

Two changes here deserve your attention. First, the TCJA expanded Section 179 expensing. The deduction limit rose to $1 million (from $510,000), and the phase-out threshold rose to $2.5 million. For family child care providers, this means you can immediately expense the full cost of qualified business equipment and property in the year you buy it rather than depreciating it over years. Playground equipment, a commercial refrigerator, learning materials that meet the cost threshold, these can all be expensed under Section 179 if they are used for the business. ^[1]

Second, the TCJA introduced 100% bonus depreciation for qualified property placed in service after September 27, 2017, and before January 1, 2023 (with a phase-down after that). This applies to used property, not only new purchases. For a provider buying used commercial laundry equipment or a second-hand commercial oven for meal preparation, 100% first-year expensing became available immediately under the new rules. ^[1]

The home office deduction itself (the room or rooms you use for daycare) runs through the Time-Space percentage and Schedule C, and the basic mechanics did not change. But the TCJA did eliminate the employee home office deduction for W-2 workers through 2025. Family child care providers are not W-2 employees of their own business, so this limitation does not apply to them. It matters, though, because providers who also hold a part-time W-2 job lost any deduction for that job's home office use.

Did the TCJA affect the food deduction family child care providers can claim?

The food deduction is one of the largest deductions available to family child care providers, and the TCJA did not change the basic rules. You still deduct the actual cost of food served to children in care, or you use the standard meal and snack rates published annually by the USDA Food and Nutrition Service under the Child and Adult Care Food Program (CACFP) tier system. ^[5]

For 2018, the CACFP standard rates (used as a proxy by providers not actually enrolled in CACFP) were set by the USDA. Providers in the lower-income Tier 1 category receive higher reimbursements through CACFP enrollment, which is separate from the tax deduction but useful to know. If you are not enrolled in CACFP, you can still use the IRS-blessed standard meal rates as your deduction method, which saves you from keeping every grocery receipt.

The rates are adjusted annually by the USDA. In 2018, the Tier 1 breakfast rate was $1.31, lunch and dinner were $2.46 each, and snacks were $0.73. ^[5] You multiply these rates by the number of meals and snacks served, and that total becomes your food deduction. You must keep a daily attendance and meal count log to support it.

For a deeper look at subsidy programs that intersect with your food costs, the childcare subsidy overview covers CCDF and CACFP connections.

How did the TCJA treat self-employment tax for home daycare providers?

Self-employment tax did not change under the TCJA. Family child care providers who are sole proprietors still pay 15.3% on the first $128,400 of net self-employment income in 2018 (the Social Security wage base for that year) and 2.9% on amounts above that. ^[6] You still deduct half of that self-employment tax on Schedule 1 of Form 1040, which reduces your adjusted gross income.

This is the part of the tax bill that stings, because self-employment tax is calculated on your net Schedule C profit before the Section 199A deduction. The new pass-through deduction cuts your income tax but does not touch your SE tax. If your net daycare profit is $35,000, you owe SE tax on $35,000 regardless of the Section 199A deduction.

The deduction of one-half of SE tax from your AGI still applies and still lowers your income tax. How SE tax, the Section 199A deduction, and the standard-versus-itemized choice fit together is exactly where a tax professional who knows family child care can save you real money. The IRS does not spell these connections out clearly, and most general-practice tax preparers miss them.

One thing to flag: if your net profit from daycare falls below $400, you do not owe SE tax for that year. This threshold did not change.

What should family child care providers actually do differently for 2018 and beyond?

Four concrete actions make sense given the TCJA changes.

First, calculate your Section 199A deduction. Most home providers qualify, and it is not automatic. You need to complete Form 8995 (or 8995-A if your income is above the threshold). A tax preparer who knows daycare taxes will know this form. One who does not may miss it entirely. ^[9]

Second, stop over-relying on Schedule A deductions. If you were itemizing before 2018 partly to deduct the non-business share of mortgage interest, re-run the math. The higher standard deduction means many providers should switch to the standard deduction and put their energy into maximizing Schedule C deductions instead. Those are worth more anyway, because they reduce both income tax and SE tax.

Third, keep detailed time logs. The Time-Space percentage drives the value of your largest home deductions. Every hour you spend on daycare-related activities in your home counts, including weekend planning and evening cleaning. The TCJA made each percentage point worth slightly more for some providers, because the Section 199A deduction is calculated on QBI, which business deductions reduce, so you want to capture everything legitimate.

Fourth, think about Section 179 expensing for equipment. If you have been holding off on a major purchase and can afford it in a high-income year, expensing it immediately under Section 179 can wipe out a big chunk of taxable income the year you buy it.

If you are working on keeping your whole compliance picture organized, the ChildCareComp compliance toolkit covers both regulatory and financial record-keeping for home providers.

For providers thinking about formal credentials that can also affect your CACFP tier status, see the cda credential article.

Are there TCJA changes that are set to expire, and when?

Yes, and this matters for long-term planning. Most of the individual tax provisions in the TCJA are temporary. Under the law as written, they are scheduled to expire after December 31, 2025. That includes the higher standard deduction amounts, the expanded Child Tax Credit, the Section 199A 20% pass-through deduction, and the favorable individual income tax rate brackets. ^[12]

The corporate tax rate cut (from 35% to 21%) is permanent. But family child care providers are almost never C-corporations, so the permanent corporate rate does not help them directly.

After 2025, if Congress does not act, the law reverts to pre-TCJA rules: lower standard deductions, personal exemptions return, Section 199A goes away, and the Child Tax Credit drops back to $1,000. As of mid-2026, Congress is actively debating extension and modification of these provisions. Watch this closely, because the Section 199A deduction alone could be worth $3,000 to $8,000 in annual tax savings for a mid-range home provider, and losing it without adjusting your withholding or estimated payments would create a nasty surprise.

Here is the practical advice. Do not restructure your entire business around provisions that may not survive. Keep good records, take the deductions you can take now, and revisit your tax strategy after any major legislation passes.

How do the TCJA changes interact with childcare subsidies and CCDF funding?

The TCJA did not directly touch the Child Care and Development Fund (CCDF), the federal block grant that funds childcare subsidies for low-income families through programs like child care assistance. CCDF is governed by the Child Care and Development Block Grant Act, most recently reauthorized in 2014, and its rules are separate from the income tax code. ^[7]

There is an indirect connection, though. If your income from CCDF subsidy payments (which reach you through state vouchers or contracts) pushes your net daycare profit higher, the TCJA's Section 199A deduction may offset some of that additional taxable income. Subsidy payments are taxable income to you as a provider, just like parent-paid tuition.

According to Child Care Aware of America, average subsidy rates paid to providers through CCDF programs vary widely by state and are frequently below market rate, which affects providers' net income and their Schedule C results. ^[8] If your state's subsidy rates are low, your net profit may already be modest, and the Section 199A deduction may deliver limited dollar benefit simply because the base QBI is small.

For state-specific licensing rules that often connect to subsidy eligibility (tiered reimbursement, quality rating systems), providers in states like Michigan should check local requirements directly. The michigan daycare licensing overview covers how state compliance ties to reimbursement tiers there.

Frequently asked questions

Does the Section 199A deduction apply to family child care providers?

Yes. Family child care is not a Specified Service Trade or Business under the IRS's final Section 199A regulations (Treasury Decision 9847). Most home providers qualify for the 20% qualified business income deduction. For 2018, the income phase-out thresholds were $157,500 for single filers and $315,000 for married filing jointly, well above what most sole-proprietor providers earn. You claim it on Form 8995.

Did the TCJA change how the Time-Space percentage is calculated?

No. The Time-Space percentage calculation is unchanged. You still divide daycare hours by total annual hours (8,760), multiply by the ratio of daycare-used square footage to total square footage, and apply the result to shared household expenses on Schedule C. IRS Publication 587 still governs this. What changed is the tax value of the resulting deductions, not the method itself.

Can I still deduct my home mortgage interest as a daycare expense after 2018?

Yes. The business-use share of mortgage interest (calculated using your Time-Space percentage) is still deductible on Schedule C and is not affected by the TCJA's cap on Schedule A mortgage interest. The personal, non-business share is the part affected by the TCJA's $750,000 mortgage cap and the higher standard deduction that now makes Schedule A itemizing less common.

What happened to the Child and Dependent Care Credit under the TCJA?

It did not change. The credit is still worth 20% to 35% of up to $3,000 in qualifying expenses for one child or $6,000 for two or more, depending on your AGI. The maximum is $1,050. It remained nonrefundable, meaning it only helps providers or families who owe federal income tax. A proposal to expand it during TCJA negotiations did not survive the final bill.

How does the elimination of personal exemptions affect home daycare providers?

For 2018, personal exemptions worth $4,050 per person disappeared. The TCJA partially offset this with a higher Child Tax Credit ($2,000 per qualifying child) and a higher standard deduction. Providers with young children generally broke even or came out ahead. Providers without qualifying dependents may have seen a net tax increase from the exemption elimination, depending on their full return.

Do I owe self-employment tax differently under the TCJA?

No. Self-employment tax is 15.3% up to the Social Security wage base ($128,400 for 2018) and 2.9% above that. The TCJA did not change the SE tax rate or how it is calculated. The Section 199A deduction reduces your income tax but not your SE tax base. You still deduct half of SE tax from your AGI, a long-standing rule that also did not change.

Should I switch from itemizing to the standard deduction in 2018?

Probably, if the non-business portion of your deductions (Schedule A items) totals less than $12,000 single or $24,000 married. But your Schedule C business deductions are unaffected by this choice and still run first. Re-run the numbers with a tax preparer who knows daycare taxes. Most home providers will take the standard deduction for personal expenses starting in 2018.

Are CACFP food reimbursements taxable income under the TCJA?

CACFP reimbursements for the provider's own children in care are not taxable. Reimbursements for other enrolled children are taxable income. This rule did not change under the TCJA. You offset taxable CACFP income with your food cost deductions, using either actual receipts or the USDA standard meal rates. Matching CACFP income against food deductions is one of the trickier parts of the home daycare return.

When do the TCJA's provisions expire for family child care providers?

Most individual provisions, including the higher standard deduction, expanded Child Tax Credit, and the Section 199A 20% pass-through deduction, are scheduled to expire after December 31, 2025. The corporate tax cut is permanent but generally does not affect sole-proprietor home providers. Watch for Congressional action; losing Section 199A alone could cost a mid-range provider thousands of dollars annually.

Can I use Section 179 to expense playground equipment or daycare furniture?

Yes. Section 179 expensing limits rose to $1 million under the TCJA. Qualified business equipment, including playground structures, furniture, appliances, and other tangible personal property used in your daycare, can be expensed fully in the year of purchase rather than depreciated over time. The business-use percentage must be reflected; if an item is also used personally, only the business-use share qualifies.

Did the TCJA change depreciation on my home used for daycare?

The basic depreciation rules for the residential home structure (39-year depreciation using Time-Space percentage) did not change meaningfully. The TCJA introduced 100% bonus depreciation for qualified personal property, which can accelerate write-offs for equipment. Depreciation recapture at sale also did not change; the portion of home gain attributable to prior depreciation deductions is still taxed at up to 25%.

Does operating as an LLC change how the TCJA applies to my home daycare?

A single-member LLC taxed as a sole proprietor is treated identically to a sole proprietorship for federal income tax purposes. The TCJA changes apply the same way. If you elect S-corp status for your LLC, different rules apply, including W-2 salary requirements that affect the Section 199A calculation. Most home providers earn too little to justify S-corp election; the administrative costs usually exceed the savings below roughly $40,000 net profit.

Do the TCJA changes affect how I report income from a childcare subsidy voucher?

No. Subsidy payments from state CCDF programs are still taxable business income reported on Schedule C, exactly as before. The TCJA did not change the tax treatment of government payments to providers. You can still deduct all ordinary and necessary business expenses against that income, and the Section 199A deduction may further reduce the taxable portion.

What records do I need to support my deductions under the current rules?

Daily attendance and meal count logs for food deductions, a time log showing hours spent on daycare activities, receipts or invoices for supplies and equipment, and a floor plan showing square footage used for daycare. These requirements did not change under the TCJA. Good records are your only defense in an audit, and the IRS does audit Schedule C businesses at higher rates than W-2 employees.

Sources

1. IRS, Tax Cuts and Jobs Act overview (Internal Revenue Service): TCJA (P.L. 115-97) created Section 199A, nearly doubled the standard deduction, eliminated personal exemptions, raised the Child Tax Credit to $2,000, expanded Section 179 to $1 million, and introduced 100% bonus depreciation, effective tax year 2018
2. IRS, Publication 587: Business Use of Your Home: IRS Publication 587 governs the Time-Space percentage method and home daycare deductions, including allocation of mortgage interest, utilities, and depreciation
3. IRS, Treasury Decision 9847: Final Regulations under Section 199A: Child care is not classified as a Specified Service Trade or Business under Section 199A final regulations; providers are not subject to SSTB phase-outs
4. IRS, Publication 503: Child and Dependent Care Expenses: The Child and Dependent Care Credit remained 20%-35% of up to $3,000 (one child) or $6,000 (two or more children) in qualifying expenses; it was not changed by the TCJA
5. USDA Food and Nutrition Service, CACFP reimbursement rates: 2018 CACFP Tier 1 standard meal rates: breakfast $1.31, lunch/dinner $2.46 each, snack $0.73; these rates are used as a proxy deduction method for providers not enrolled in CACFP
6. IRS, Schedule SE (Form 1040), Self-Employment Tax: Self-employment tax rate is 15.3% on net SE income up to the Social Security wage base ($128,400 in 2018) and 2.9% above; TCJA did not change SE tax
7. Office of Child Care (HHS), Child Care and Development Fund (CCDF): CCDF is governed by the Child Care and Development Block Grant Act (most recently reauthorized 2014) and was not directly modified by the TCJA
8. Child Care Aware of America, The US and the High Cost of Child Care: Average subsidy rates paid to providers through CCDF programs vary widely by state and are frequently below market rate, affecting provider net income and Schedule C results
9. IRS, Form 8995: Qualified Business Income Deduction Simplified Computation: Form 8995 is the simplified form used by most sole-proprietor home daycare providers to claim the Section 199A 20% qualified business income deduction
10. National Association for Family Child Care (NAFCC), Tom Copeland tax resources: The Time-Space percentage method for home daycare tax deductions is documented by NAFCC and Tom Copeland; the TCJA did not change this calculation method
11. IRS, Rev. Proc. 2017-58: 2018 standard deduction amounts: The 2018 standard deduction is $12,000 for single filers and $24,000 for married filing jointly under the TCJA, roughly double the 2017 amounts
12. Congressional Budget Office, Federal Budget Effects of the Tax Cuts and Jobs Act: Most individual provisions of the TCJA, including the Section 199A deduction and higher standard deduction, are scheduled to expire after December 31, 2025