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Providing Childcare For Your Employees? You may qualify for a huge credit
The Credit for Employer-Provided Childcare Facilities is tax credit that encourages employers to provide childcare to their employees. An employer can get a tax credit up to $150,000 per year to offset 25% of qualified childcare facility expenses and 10% of qualified childcare resource and referral expenses.
This general business credit is for companies that provide childcare services to their employees. This covers childcare facilities, childcare resources, and referrals.
For more detailed information, refer to Employer-provided childcare credit at IRS.gov, but here is the summary of eligibility requirements in order to claim this big credit.
Eligibility
A company can claim the credit if it pays or incurs qualified childcare expenses for its employees during the tax year.
Expenditures on childcare are qualified if:
• Amounts paid to acquire, build, renovate, or expand a qualified childcare facility for the taxpayer.
• Tax-deductible childcare facility expenses include amounts paid for training and scholarships for employees with higher levels of childcare training, as well as increased compensation for these employees.
• Employee childcare services provided by a qualified childcare facility under a contract with the taxpayer.
Qualified Facility
In order to be qualified, a childcare facility needs to meet all the state and local laws and regulations. The facility needs to be licensed as a childcare center.
There are also these requirements:
• Unless the facility is also the principal residence of the person operating the facility, the main use of the facility must be childcare assistance.
• Employees of the taxpayer must be able to enroll in the facility.
• At least 30% of the facility's enrollees have to be dependents of the taxpayer's employees if it's their principal trade or business.
• You can't discriminate against highly compensated employees in using the facility
Qualified Expenditures
Spending on childcare facilities qualifies as qualified expenditures if you pay or incur the following:
• Buying, building, renovating or expanding property that:
Qualified childcare facilities for taxpayers
• Property that can be depreciated (or amortized)
• Doesn't count as the taxpayer's principal residence or any employee's principal residence
• Provide childcare to taxpayers. Employees with higher levels of childcare training get paid more, training is available, and scholarships are available.
Expenses over fair market value are not included in qualified childcare facility expenditures.
Qualified resource and referral expenditures
These are the costs you're paying or incurred under a childcare resource and referral contract.
Note that you can't get double benefits, these items must be reduced by the credit amount
How to claim the credit
You can claim the credit on Form 8882, Credit for Employer-Provided Childcare Facilities.
You can't claim more than $150,000 in credit. Expenses that exceed the credit amount can be deducted.
Sources
"Tax Credit for Employer-Provided Child Care Facilities & Services" - Civitas Strategies
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Frequently Asked Questions
What is the maximum tax credit an employer can receive for providing childcare to employees?
Employers can receive a tax credit of up to $150,000 per year through the Credit for Employer-Provided Childcare Facilities. The credit covers 25% of qualified childcare facility expenses and 10% of qualified childcare resource and referral expenses. Any expenses that exceed the $150,000 credit limit can still be deducted.
What types of expenses qualify for the employer-provided childcare tax credit?
Qualified expenses include amounts paid to acquire, build, renovate, or expand a childcare facility, as well as costs for employee training, scholarships for employees with higher levels of childcare training, and increased compensation for those employees. Costs paid under a childcare resource and referral contract also qualify. However, expenses above fair market value are not included in qualified childcare facility expenditures.
What requirements must a childcare facility meet to be considered "qualified" for this credit?
The facility must meet all applicable state and local laws and regulations and be licensed as a childcare center. At least 30% of the facility's enrollees must be dependents of the taxpayer's employees if childcare is their principal trade or business, and all employees of the taxpayer must be able to enroll. Additionally, the primary use of the facility must be childcare, unless the operator also uses it as their principal residence.
Can employers discriminate in who gets access to the childcare facility when claiming this credit?
No, employers cannot discriminate against highly compensated employees when providing access to the qualified childcare facility. All employees of the taxpayer must be permitted to enroll in the facility. Failing to meet this non-discrimination requirement would disqualify the facility from meeting the credit's eligibility standards.
How does an employer actually claim the Credit for Employer-Provided Childcare Facilities?
Employers claim this credit by filing Form 8882, Credit for Employer-Provided Childcare Facilities. This is a general business credit, meaning it is claimed as part of the broader general business credit framework on the employer's tax return. It's important to note that double benefits are not allowed, so any items used to calculate the credit must be reduced by the credit amount claimed.
About the Author
CPA
Jacob Dayan is a tax professional at IRS.com with expertise in U.S. federal and state tax law. Their articles are written to help taxpayers understand complex tax topics in plain English.