Most childcare owners find out what they owe in taxes in the spring, when there is little left to change. In this session, Navneet Rastogi, Founder and CEO of illumine, was joined by Steven Erickson, a wealth strategist and financial advisor with Wealth Investment Services, to talk about why the months between back-to-school and December 31 are the real planning window for US childcare owners, and which strategies he sees owners overlook. This is the written recap. The full recording is at the top of this page.
Speakers
Navneet Rastogi, Founder and CEO, illumine
Steven Erickson, Wealth Strategist and Financial Advisor, Wealth Investment Services
Best for
US childcare owners planning ahead of the December 31 deadline
Session length
70 minutes
In this recap
Why to plan before year-end, the strategies discussed and the numbers to have ready
Please note
This recap summarizes the views shared in the session for general education. It is not tax, legal or investment advice. Steven opened by noting that his team are wealth strategists, not CPAs or tax advisors, that the strategies discussed are investments that can lose value and carry no guarantees, and that owners should work alongside their own CPA.
Key takeaways
- Tax season tells you what you owe. The months before year-end are when you can still change it. Most of the strategies discussed must be funded by December 31.
- Steven's advice was to start conversations in the fall, once back-to-school enrollment settles, rather than in the rush between Thanksgiving and Christmas.
- Selling a center or building creates capital gains, and possibly depreciation recapture. Planning before you list, and before money reaches your bank account, is what keeps tax-deferral options open.
- Gains from almost any sale, including stocks, real estate or a business, may be eligible for qualified opportunity zone investments, which are changing from 2027.
- Before any of this, know your numbers: revenue, cash reserves and what you paid in tax last year.
- The strategy Steven says most childcare owners overlook is accelerated depreciation through a cost segregation study.
Why the planning window is now
Tax season is when you find out what you owe... Year end now is when you can actually change it.
Navneet opened with a pattern he sees often. Owners are fully focused on back-to-school and new enrollments in August and September, and by the time they turn to taxes in December, many options have closed.
Steven agreed. His team receives a surge of referrals from CPAs between Thanksgiving and Christmas, and at that point everything is rushed. He would rather have time to understand an owner's goals, explain the options and go through the pros and cons of each before anything is decided. In a live poll, many attendees said they had never discussed tax-saving strategies with an advisor, and none had done so this quarter.
When Navneet asked about the difference between acting in December and waiting until April, Steven explained that most of the investments he discussed need to be funded before December 31. The exception he mentioned is a SEP IRA, which can be funded up to the filing deadline.
A second poll asked which goal mattered most to attendees. Most said they wanted to shelter more of their income.
When you sell a center or building
Steven's simplest example was the sale of a business. Without planning, a large sale can push the owner into the top federal bracket, and state income tax comes on top. If you own the real estate, there may also be depreciation recapture, which is taxed as ordinary income.
One option he described for real estate is a 1031 exchange into a Delaware statutory trust (DST):
- A DST is a fractional ownership of larger, professionally managed property, such as apartment complexes, industrial buildings or retail centers, with no management responsibilities for the investor.
- Owners can spread the proceeds across several DSTs in different sectors and states.
- In an exchange, you have 45 days to identify replacement properties and 180 days to complete the purchase. Steven noted that a DST can serve as a backup if another replacement property falls through.
- The proceeds must go to a qualified intermediary. If the money lands in your own bank account, the opportunity for a tax-deferred exchange is gone.
He also explained the estate-planning angle: under current rules, heirs receive a step-up in cost basis when they inherit the property.
When you have a capital gain this year
For gains from almost any sale, including stocks, real estate, cryptocurrency, art or a business, Steven described qualified opportunity zones (QOZs). These were created by the 2017 Tax Cuts and Jobs Act to encourage investment in designated low-income areas, of which there are more than 8,700 across the US. Investments generally need to be made within 180 days of the sale that created the gain, and they are long-term and illiquid: Steven noted that the tax benefits on growth come from holding for at least 10 years.
He explained that the original program is winding down, with deferred gains coming due at the end of 2026. Under the One Big Beautiful Bill Act, opportunity zones become permanent from January 1, 2027, with a rolling five-year deferral and a step-up in cost basis after five years: 10 percent for urban projects and 30 percent for rural ones.
- A sale creates a capital gain
- Invest the gain in a QOZ within 180 days
- From 2027: basis step-up after 5 years
- Hold 10 years: no tax on the growth
As Steven described the rules. QOZ investments are long-term and illiquid, so confirm the details for your situation with your CPA.
Other strategies covered
Roth IRA conversions at a reduced valuation
Steven described converting IRA holdings in certain development projects after their appraised value has dropped during construction, so the tax on conversion is lower. He stressed the importance of due diligence on the developer's track record and financials.
Oil and gas investments
Aimed at owners with high W-2 income, these can allow a large share of the investment to be deducted in the first year through intangible drilling costs. When an attendee questioned investing in oil, Steven said owners with a moral objection should simply not invest in it.
831(b) plans
Steven described these as small captive insurance companies that can protect a business against risks such as lost revenue, reputational damage or the loss of a subsidy program, while allowing premiums to be deducted. The IRS has issued rules that treat some 831(b) micro-captive arrangements as reportable transactions, so owners considering one should get advice from a qualified tax professional.
Know your numbers first
An attendee asked which numbers owners should look at before considering any of these strategies. Steven's first check is cash reserves. He wants to see at least three months of payroll set aside and untouched, because a business needs liquidity. Only money beyond that cushion is worth discussing. The other two numbers he asks for at the start are revenue and the taxes paid last year.
Navneet then showed how illumine helps owners get those numbers quickly:
- A billing dashboard showing what has been billed, collected and overdue, revenue by program, collections from parents versus subsidies, discounts, and collection trends. See childcare billing software.
- Subsidy calculations applied automatically to a child's invoices, including a co-pay, and removed when the subsidy expires. See subsidy management.
- Collection and leakage alerts, such as families who have not added a payment method for autopay, or children attending a program without an invoice.
- AI reports that let owners ask questions such as "what are my outstanding invoices?" in plain language, with results that can be exported to Excel and shared with an advisor.
- Tax statements for families, available in the parent app.
Questions from the session
If an owner has both the childcare business and the building it runs from, when should they start thinking about this?
Steven's answer was before listing the property. That is the point to compare options, such as a 1031 exchange into a DST or leasing the building to the next owner, which he said is sometimes the better choice. Once there is an offer on the table, the conversation is urgent, because the sale proceeds must go through a qualified intermediary for an exchange to work.
What is the difference between planning in December and planning in April?
Most of the strategies discussed have to be funded by December 31 to count for that tax year. The one exception Steven mentioned is a SEP IRA, which can be funded until you file.
What numbers should owners pay closest attention to before considering these strategies?
Cash reserves first, with at least three months of payroll set aside. Then revenue, excess cash beyond that cushion, and last year's tax bill.
What is the one thing childcare owners overlook when it comes to taxes?
Steven pointed to accelerated depreciation using a cost segregation study. Many owners he meets have never heard of it. A study separates parts of a building, such as flooring or appliances, that can be depreciated over a much shorter period than the building itself, which can reduce taxes significantly. His advice was to ask your tax advisor whether you are using accelerated depreciation and whether a cost segregation study makes sense.
Does illumine run payroll?
Navneet explained that illumine handles staff time tracking, time off and scheduling, and produces a payroll report that can be exported to your payroll system. It does not run payroll itself.
What to do next
- Pull together this year's revenue, your cash reserves and last year's tax bill.
- Book time with your CPA, and any financial advisor you work with, before the holiday rush.
- If you are thinking about selling a center or building, talk to your advisors before you list it.
- Ask whether accelerated depreciation and a cost segregation study apply to your property.
To see how illumine gives childcare owners a clear view of revenue and collections, explore daycare management software or book a live demo.