As the owner and operator of Cuddles Academy, a home-based child care business in San Diego, Megan Hanshew provides families with a loving and safe place where children can grow and thrive while their parents are working. The focus is on social-emotional development and building relationships that last long after children have graduated from the program. Since 2002, Cuddles Academy has cared for over 300 families from the community, many paying with public subsidy vouchers. In 2010, Megan purchased her home, deepening the commitment to help families for many more years.
When the opportunity arose to apply for first-time state grant funding for child care facilities through the Child Care and Development Infrastructure Grant Program (IGP), for which LIIF serves as facilities fund manager, Megan was relieved at the possibility of help. Cuddles Academy initially received a minor repair and renovation grant, which funded fresh coats of paint, replacing an HVAC system, room insulation and fence repair. In 2023, the program received a second IGP grant for new construction and major renovation. To increase enrollment, Cuddles Academy needed to add an emergency exit and create a safer pathway to the home’s outdoor learning environment. This also increased the 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 small businesses and families alike will benefit from the state of California making this historic investment in child care facilities.
While waiting for reimbursements and due to inflation and the rising cost of materials, Cuddles Academy’s project expenses have almost doubled from their original 2022 application estimates. “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,” laments Megan.
An accountant and Megan estimate the additional 2024 federal and state tax burden for the IGP award will be $27,662; when she eventually received 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 a 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 the provider’s annual gross income, affecting 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,” explains Megan. This 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 should not be taxed as personal income. There is precedent: California Small Business COVID-19 Relief Grants were specified as exempt from gross taxable income for state tax years 2020 to 2029. These grants directly invest in small businesses that serve the community, such as IGP. The proposed fire-hardening grants established in the wake of the Los Angeles fires would also be tax-exempt.
Megan is 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,” concludes a hopeful Megan.
With the right champions, I hope this change can give relief to providers who received their checks in 2024 and beyond.
Cuddles Academy Owner Megan Hanshew