Successful State Funded Child Care Facilities Grant Program Complicated by Tax Burden
By Megan Hanshew, family child care provider
As the owner and operator of Cuddles Academy, a home-based child care business in San Diego, I provide families with a loving and safe place where children can grow and thrive while their parents are working. We focus on social-emotional development and build relationships that last long after children have graduated from our program. Since 2002, I have cared for over 300 families in my community, many paying with public subsidy vouchers. In 2010 I purchased my home, deepening my commitment to help families for many more years.
When the opportunity arose to apply for first time ever state grant funding for child care facilities through the Child Care and Development Infrastructure Grant Program (IGP), I was relieved at the possibility of help. Cuddles Academy first received a minor repair and renovation grant which funded fresh coats of paint, replacing my HVAC system, room insulation, and fence repair. In 2023, our program received a second IGP grant for new construction and major renovation. To increase enrollment, we need to add an emergency exit and create a safer pathway to our outdoor learning environment. This will also increase our ability to spend more time outdoors, maximizing the health benefits of fresh air.
The physical spaces where children spend their early years of development are often referred to as the “third teacher.” Research strongly links time spent in high-quality learning environments with positive child development outcomes. The IGP was established in response to a frustrating puzzle in the child care field: how can providers afford to maintain facilities and increase space to serve more families while running on razor thin margins? Countless child care businesses and families alike will benefit from the state of California making this historic investment in child care facilities.
While waiting for reimbursements, my project expenses have almost doubled from my original 2022 application estimates due to inflation and the rising cost of materials. Two weeks before the end of 2024, a partial reimbursement check from the California Department of Social Services arrived. But my relief of payment was overshadowed by the sudden jump in my income for the year.
My accountant and I estimate the additional 2024 federal and state tax burden for the IGP award will be $27,662. When I eventually receive payment for the remaining portion, the tax burden will likely increase to $37,899 in total. While brick-and-mortar businesses can fully deduct most expenses related to their business, only a small portion of the improvements to my home business are eligible for depreciation because these renovations are to both a business and a private residence. As a sole proprietor, this additional money increases my annual gross income, affecting my eligibility for various programs such as Covered California. Even I, a seasoned business owner, couldn’t prepare for the eleventh-hour check. Budget overages such as these are why child care programs increase pricing, which in turn affects the community’s child care service needs.
Because IGP awards must be spent on facility projects that directly improve the quality of child care, they shouldn’t be taxed as personal income. There is precedent: California Small Business COVID-19 Relief Grants, specified as exempt from gross taxable income for state tax years 2020-2029. These grants directly invest in small businesses that serve the community like IGP. The proposed fire hardening grants established in the wake of the Los Angeles fires would also be tax-exempt.
I am part of Build Up California, which is working with legislators to continue funding IGP to help more providers benefit from these transformative projects, as well as pass an urgency measure that would deem IGP awards exempt from state income tax. With the right champions, I hope this change can give relief to providers who received their checks in 2024 and beyond. This program has transformed my child care business, and it is my wish that other child care programs serving the community can benefit from future awards while being spared unintended financial hardship.
Megan Hanshew is the owner and operator of Cuddles Academy, a home-based child care program in San Diego.
