Employers may be able to claim a tax credit for a portion of their expenses for providing child care to their employees. Code Sec. 45F allows a employer-provided child care credit, which is a part of the general business credit. Businesses calculate the credit using Form 8882, Credit for Employer-Provided Childcare Facilities and Service, and enter any credit amount on Form 3800, General Business Credit, which must be attached to an employer’s tax return.
Amount of the credit
The amount of the credit is the sum of 25 percent of an employer’s “qualified childcare facility expenditures,” plus 10 percent of the employer’s “qualified childcare resource and referral expenditures” for the tax year. The total credit amount is limited to $150,000.
Qualified childcare facility expenditures
Examples of expenses that are qualified child care expenditures include:
- Expenses paid or incurred to acquire, construct, rehabilitate, or expand a qualified child care facility that (i) is to be used by the taxpayer; (ii) is depreciable property; and (iii) is not the principal residence of the taxpayer or any of the taxpayer’s employees;
- Expenses for operating costs of a qualified child care facility (i.e. providing childcare training), and
- Amounts paid or incurred under a contract with a qualified child care facility to provide childcare to the taxpayer’s employees.
Fair market value. Employers should consider the fair market value of childcare expenditures. The IRS may question expenses that exceed the fair market value of the care provided. For example, alarm bells may ring if in a given area, expenses to operate a childcare facility are only half of what the employer claims.
Qualified childcare facility
It should go without saying that child care expenses are only qualified for purposes of claiming the credit if the expenses were paid or incurred with respect to a qualified child care facility. This is defined as a facility whose principal use—unless it is the principal residence of the operator—is to provide child care assistance. A qualified childcare facility must also meet the requirements of all applicable state and local laws and regulations, including licensing requirements. Furthermore:
- A facility must have enrollment open to employees of the taxpayer during the tax year; and
- The facility may not discriminate in favor of highly compensated employees.
- Finally, if the facility itself is the principal trade or business of the taxpayer, at least 30 percent of the children enrolled must be dependents of employees of the taxpayer.
Qualified childcare resource/referral expenditures
An expense qualifies as a qualified child care resource and referral expenditure if it is paid or incurred under a contract to provide child care resource and referral services to an employee of the taxpayer.
No double benefit
Taxpayers are not entitled to double benefits from the same expenditures. For example, if an employer claims a credit for expenses of constructing, rehabilitating, or expanding a qualified childcare facility, the employer must reduce its basis of the property by the amount of the credit. If the credit is subsequently recaptured, however, the employer may increase the basis of the property by the amount of the credit recaptured.
If a recapture event occurs during the first ten years after a qualified childcare facility is placed into service, the employer must pay back all or a portion of any amount of the employer-provided child care credit taken for qualified child care expenditures with respect to that qualified child care facility. The amount of the credit that must be recaptured decreases over the ten-year period. In addition, recapture applies only to the portion of the credit attributable to qualified child care expenditures, not to qualified child care resource and referral expenditures.
One example of an event that would trigger recapture is if the facility ceases to be operated as a qualified child care facility or if there is a change of ownership in the facility within the ten-year period.
If you have any questions about how to compute the employer-provided childcare credit, please contact our offices.
For regular tax updates by email, click here.