The COVID-19 pandemic has led to a significant increase in the number of employees working from home. Given the convenience of remote work, especially for parents of young children, employers of in-person workers are under increasing pressure to provide child care.
Fortunately, the tax code provides an incentive, in the form of the Section 45F employer-provided child care credit. Here’s how it works.
The Sec. 45F credit is part of the general business credit, which is composed of more than 30 separate tax credits that are subject to combined limits based on your tax liability. To calculate and claim the credit, a business files Form 8882, Credit for Employer-Provided Child Care Facilities and Services.
The credit is equal to 25% of an employer’s qualified child care facility expenditures plus 10% of its qualified child care resource and referral expenditures paid or incurred during the tax year. It’s limited to a total of $150,000 per tax year.
Qualified child care facility expenditures are amounts paid:
- To acquire, construct, rehabilitate or expand property that’s 1) to be used as part of a qualified child care facility of the taxpayer, 2) depreciable or amortizable, and 3) not part of the principal residence of the taxpayer or one of the taxpayer’s employees;
- To operate a qualified child care facility of the taxpayer, including expenses for training, scholarship programs and increased compensation for employees with child care training; or
- Under a contract with a qualified child care facility to provide child care services to taxpayer’s employees.
To qualify, expenses must not exceed the fair market value of the child care provided. A qualified child care facility is one that meets all state and local regulatory requirements and:
- Is used principally to provide child care (unless it’s also the personal residence of the person who operates it),
- Is open to all of the taxpayer’s employees during the tax year, and
- Doesn’t discriminate in favor of highly compensated employees.
In addition, if the facility is the taxpayer’s principal trade or business, at least 30% of enrollees must be dependents of the taxpayer’s employees.
Special rules and restrictions
Qualified expenditures are amounts paid under a contract to provide resource and referral services to help a taxpayer’s employees find child care. To avoid double benefits from the same expenditures, the taxpayer must reduce its basis in any qualified child care facility by the amount of the credit attributable to facility-related expenditures. The taxpayer must also reduce other deductions or credits that are based on the same expenses.
Taxpayers may have to recapture (pay back) some or all of the credit if a qualified child care facility ceases to operate as such, or undergoes a change in ownership, before the tenth tax year after the tax year in which it’s placed in service. The percentage of the credit that must be recaptured decreases gradually over the 10-year period.
Valuable recruiting tool
As employers compete for a shrinking labor pool and remote work becomes more common, employer-provided child care can be an attractive perk for current and prospective employees. The Sec. 45F tax credit can help reduce the cost of these benefits.
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