Workers with children struggle to answer the call of duty at home when they’re occupied at work. Businesses nationwide have chosen to address this issue and bolster their workers’ family lives by offering child care benefits to their employees. If your business offers this benefit, you may be eligible for an employer child care tax credit that can significantly reduce your tax bill.

What is the Employer Child Care Tax Credit?

Employers with qualifying expenditures toward childcare facilities, resources or referrals for the benefit of their employees may be eligible to claim the Credit for Employer-Provided Childcare Facilities and Services, which falls under the provisions of a general business credit. You can claim the credit at any time within three years from the due date of your return.

According to the IRS, the value of the credit amounts to 25 percent of childcare facility expenditures plus 10 percent of the qualified childcare resource and referral expenditures paid or incurred during the tax year. The IRS limits the credit to $150,000 per tax year. Note that you may need to further reduce the credit as cited in the No Double Benefit or Recapture of Credit provisions cited in IRS Publication 8882.

Employers can use Form 8882 to calculate the credit. Excluding S corporations, partnerships, estates or trusts, other taxpayers need not file Form 8882 itself, but can report their credit directly on Form 3800.

While you could also conceivably deduct such costs as business expenses under the “ordinary and necessary” clause, the tax credit may result in a greater reimbursement of expenditures as small business tax credits directly reduce your tax liability rather than simply reduce taxable income like a deduction.

What Constitutes Qualifying Child Care Expenditures?

Qualifying expenditures are defined by the IRS as those that are paid or incurred for the following:

  • To acquire, construct, rehabilitate or expand property that:
    • Is used as part of a qualified childcare facility of the taxpayer
      • A qualified childcare facility is one that satisfies the laws and regulations of the state or local government in which it is located, as well as additional conditions laid out in Publication 8882.
    • Is either depreciable or amortizable
    • Is not part of the principal residence of the taxpayer or his/her employees
  • For operating expenses of a qualified childcare facility, including expenses for employee training, scholarship programs or providing greater compensation to employees with specialized childcare training skills.
  • In contract with a childcare facility to provide childcare services to employees of the taxpayer.
  • To provide childcare resource and referral services to employees of the taxpayer.
Manasa Reddigari

Manasa Reddigari

Manasa Reddigari is a freelance technical writer and small business owner whose insights have appeared in diverse digital publications. She has a passion for leveraging technology to reveal simple solutions for everyday business finance complexities. Visit www.scribmint.com to learn more about her work.
Manasa Reddigari

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