Home Day Care Resources

"and then write that 'compensated' time off as an expense"

That's fine as long as they also picked it up as income elsewhere on the return ------------------------ which I'm guessing they didn't.  It's a left pocket to the right pocket deal.  If they take a deduction for their time on one business, they need to pick it up as income on another business.  However, they can't just magically take a deduction on their return for their own time.

"Also, their former tax advisor allowed them to pay themselves (husband and wife) two hours each day to clean their house after the children left for the day, and then write that 'compensated' time off as an expense. Curious if that is common?"

Yes, it is Common that people filing Sched C try to include their draw as if that is Payroll and as if that is expense. Is it right? No. Nothing they "pay themselves" for is Expense. Or, one of them is on payroll and this really is a Sole Proprietorship? Because SP is never "on payroll."

Did you google:

Daycare business tax reporting

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@SensibleandHourly wrote:

Also, their former tax advisor allowed them to pay themselves (husband and wife) two hours each day to clean their house after the children left for the day, and then write that 'compensated' time off as an expense.

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They can't claim it as an expense, but they CAN claim those hours as part of their Time/Space percentage for their home office hours.

This book by Tom Copeland is an great resource for what is deductible (but it is aimed at the daycare provider, not necessarily the tax preparer).  Realistically, A LOT is deductible.  In some cases, almost everything.

https://www.amazon.com/gp/product/1605543977/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=1605543977&linkCode=as2&tag=pridetaxpre04-20&linkId=TULX763MACL6XUVD

I do a lot of daycare tax returns, so if you have any questions, let me know.

https://whereimaginationgrows.com/home-daycare-tax-deductions/ seems fairly thorough. 

Are they licensed? In my State, the licensed providers take continuing ed classes, and my QuickBooks class qualified for that. You'd be surprised how much they learn from someone who can explain what is and is not business expense.