It all depends on the law in your state.
Family Day Care: This type of child care is provided in the home of the provider, is nonmedical and is usually for less than 24 hours. Regulations differ from state to state; however, most states regulate facilities that care for more than four children. Most states require family care providers to have criminal background checks, preservice and/or ongoing training as well as state inspection on an annual or random basis. All states set minimum health, safety, and nutrition standards for providers. Where there are government regulatory requirements, the provider is required to be approved, certified, registered or licensed under the applicable state or local law. [Compliance with regulatory requirements may be important as it could affect the deduction for the business use of the home (discussed later) under Internal Revenue Code (“IRC”) Section 280A(c)(4).] Contact the applicable state or local agency for their regulations, which can be found via the link cited below.
Essentially, what you might run into is not being allowed business use of home deductions. These include writing off a portion of utilities, mortgage interest, depreciation and other expenses directly related to maintaining your home
The linked article is advising IRS agents that audit such child care providers on how to scrutinize the business. You should read it, it would be very informative to someone providing child care from their home.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Child-Care-Provider-Audit-Technique-G...
Here is another IRS Publication that is more general regarding business use of your home:
http://www.irs.gov/pub/irs-pdf/p587.pdf
