Employer Child Care Credit
Note:
This credit is rarely used, and when it is, generally only by larger firms. However, Congress is considering legislation that will substantially increase the credit; thus this material has been included in anticipation of more liberal benefits and potentially more firms taking advantage of the credit.
Overview
Applies to businesses that provide childcare facilities & services.
Amount of Credit
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25% of Qualified Child Care Expenses.
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10% of Qualified Child Care Resource and Referral Expenditures
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Max credit allowed for any tax year is $150,000.
Related IRS Code, Publications and Forms
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IRC Section 38 general business credit.
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IRC Section 45F Employer provided Child Carecredit
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Form 3800 - General Business Credit
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Form 8882 - Credit for Employer-Provided Childcare
The Employer Child Care Credit, codified under IRC Section 45F, is a tax incentive designed to encourage businesses to provide childcare services for their employees. This credit can be a valuable tool for employers looking to support their workforce while also benefiting from tax savings. This guide will cover the detailed qualifications, eligibility, definitions, credit amounts, limitations, and other specifics related to the Employer Childcare Credit.
Who is Eligible
To be eligible for the Employer Child Care Credit, a business must incur expenses related to providing childcare services to its employees. This includes both direct expenses for operating a childcare facility and indirect expenses such as resource and referral services. The credit is available to all types of businesses, including corporations, partnerships, and sole proprietorships.
Definition of Qualified Child Care Facility
A "qualified childcare facility" is defined as a facility that meets the following criteria:
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The primary use of the facility must be to provide childcare assistance.
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The facility must comply with all applicable state and local laws and regulations, including licensing requirements.
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The facility cannot be the principal residence of the operator.
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Enrollment in the facility must be open to employees of the taxpayer during the taxable year.
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The use of the facility must not discriminate in favor of highly compensated employees, as defined by IRC Section 414(q).
Qualified Expenses for the Employer Child Care Credit
Qualified expenses for the Employer Child Care Credit include:
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Costs incurred to acquire, construct, rehabilitate, or expand property used as part of a qualified childcare facility.
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Expenses related to the operation of a qualified childcare facility, including employee training, scholarship programs, and increased compensation for employees with higher levels of child care training.
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Costs incurred under a contract to provide childcare resource and referral services to employees.
Amount of the Credit
The Employer Child Care Credit is composed of two parts:
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25% of Qualified Child Care Expenses. This includes expenses for acquiring, constructing, rehabilitating, or expanding a qualified childcare facility, as well as operating costs.
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10% of Qualified Child Care Resource and Referral Expenditures. This includes expenses for providing childcare resource and referral services to employees.
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The total credit allowed for any given tax year cannot exceed $150,000.
Credit Limitations
The credit is subject to the limitation and carryover provisions of the IRC Section 38 general business credit. This means that if the credit exceeds the taxpayer's liability for the year, the excess can be carried back one year and forward up to 20 years.
How It Affects Employees
The Employer Child Care Credit can have several positive effects on employees:
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Employees gain access to affordable and convenient childcare services, which can reduce stress and increase productivity.
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Employees may save money on childcare expenses, as the employer-subsidized services are often more affordable than private options.
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Access to reliable childcare can help employees achieve a better work-life balance, leading to higher job satisfaction and retention.
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If the employer provides childcare services directly (e.g., through an on-site childcare facility), the value of these services is generally not taxable to the employee, provided the facility meets the requirements of a "qualified childcare facility" under IRC Section 45F.
Reimbursement or Payment to Third-Party Providers: If the employer reimburses the employee for childcare expenses or pays a third-party provider directly, the amount may be excludable from the employee's income under certain conditions. Specifically, the exclusion applies if the benefits are provided under a qualified dependent care assistance program (DCAP) and meet the requirements of IRC Section 129. The annual exclusion limit for dependent care assistance is $5,000 ($2,500 if married filing separately).
Non-Qualified Benefits: If the childcare benefits do not meet the requirements of a qualified dependent care assistance program or exceed the exclusion limits, the excess amount would be taxable to the employee and should be included in their gross income.
In summary, the taxability of the employer-funded portion of the childcare benefits to the employee depends on how the benefits are structured and whether they meet the requirements for exclusion under IRC Section 129. Employers should ensure compliance with these requirements to provide tax-free benefits to their employees.
Forms Used
To claim the Employer Child Care Credit, businesses must use the following forms:
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Form 8882 - Credit for Employer-Provided Childcare Facilities and Services. Calculate the credit.
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Form 3800 - General Business Credit. Report the credit as part of the general business credit.
Basis Issues
When a business claims the Employer Childcare Credit, the basis of the property used for the qualified childcare facility must be reduced by the amount of the credit. This means that the depreciable basis of the property will be lower, which can affect future depreciation deductions.
Recapture
If a qualified childcare facility ceases to operate or changes ownership, a recapture event may occur. In such cases, the taxpayer's tax liability for the year will be increased by the recapture amount. The recapture amount is calculated as the product of the applicable recapture percentage (see nearby table) and the aggregate decrease in credits allowed for all prior taxable years. Recapture events include:
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Cessation of operation, where the facility stops operating as a qualified childcare facility.
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Change in ownership, where the facility changes ownership, unless the new owner agrees to assume recapture liability.
No recapture is required if the cessation of operation is due to a casualty loss, provided the loss is restored by reconstruction or replacement within a reasonable period.
Aggregating Employers
In cases where multiple employers jointly provide childcare services, the credit can be allocated among the employers based on their respective contributions to the qualified expenses. Each employer must separately meet the requirements for the credit and file the necessary forms.
Expenses Considered Ordinary and Necessary
Expenses incurred by employers to provide childcare services to employees can be considered ordinary and necessary business expenses. These expenses can be deducted under IRC Section 162, provided they are directly related to the business and are reasonable in amount. However, to prevent a double benefit,
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Any otherwise allowable deductions used to figure the credit must be reduced by the amount of the credit allocable to those deductions, and
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Any of the childcare services-related expenses used to figure any other credit must be reduced by the amount of the credit allocable to those expenses (for purposes of figuring the other credit).
California Differences
California used to have an Employer Child Care Contribution Credit, but it is no longer available after 2011. However, any unused credit from prior years can still be carried over until it is fully utilized. Over the years since the state credit expired, and as recently as 2023, various bills have been introduced in the legislature to resurrect an employer child care contribution credit, but none have gained traction so far.