The Child Care Tax Credit for Businesses
Unutilized Child Care Tax Break Offers Big Savings and Boosts Employee Satisfaction
Many businesses are unaware of, or simply overlook, the Sec. 45F child care tax credit. This credit offers employers significant tax savings while simultaneously enhancing employee recruitment and retention in a competitive job market. Let’s delve into the details of this valuable benefit.
Understanding the Sec. 45F Credit
The Sec. 45F credit allows employers to offset a portion of their child care expenses against their tax liability. The credit is worth up to $150,000 annually and applies to 25% of qualified child care facility expenditures and 10% of qualified child care resource and referral service costs. Employers can also deduct any qualifying expenses exceeding the credit limit.
Qualifying for the Credit
There are specific requirements for both the child care facility and the employer to qualify for the Sec. 45F credit. The facility must meet state and local regulations, and its primary function must be child care assistance. Additionally, the facility must be open to employee enrollment during the tax year, and at least 30% of enrollees (if the facility is the employer’s primary business) must be employee dependents. Importantly, the facility cannot discriminate against highly compensated employees.
There’s a recapture provision associated with the credit, meaning the credit may need to be repaid if the facility ceases to operate as a child care center or undergoes certain ownership changes within ten years of claiming the credit.
The Sec. 45F Child Care Tax Credit, combined with dependent care assistance programs, can make a substantial dent in the costs you’d incur to offer a desirable employee perk.”
Combining the Credit with Other Tax Benefits
While employers can deduct child care expenses as a business cost, the Sec. 45F credit typically offers greater tax savings. Furthermore, employers can often combine both benefits. For instance, if your business spends $700,000 on a qualified child care facility, you can claim the credit for 25% of $600,000, resulting in a $150,000 credit. However, you would need to reduce your business expense deduction by the amount of the credit. At a 21% corporate tax rate, this scenario offers total tax savings of $265,000 compared to only $147,000 if you solely claimed the business expense deduction.
Maximizing Benefits with Dependent Care Assistance
Employers can significantly enhance the value proposition for employees by offering a qualified dependent care assistance program (DCAP) alongside the Sec. 45F credit. DCAPs allow employers to provide tax-free assistance to employees for qualified child care expenses, up to $5,000 per employee annually. This benefit reduces employee income and payroll taxes, while also saving the company on payroll taxes.
Key Considerations
The Sec. 45F credit is a nonrefundable credit, meaning any unused amount cannot exceed your total tax liability for the year. However, the credit can be carried back one year or forward 20 years to offset past or future tax burdens.
The IRS recently launched a dedicated resource page to raise awareness of the Sec. 45F credit. Employers seeking to offer a desirable benefit to employees and reduce their tax burden should strongly consider exploring the Sec. 45F credit. Consult with your tax advisor to determine if your business qualifies and to navigate the process of claiming the credit.
Questions?
Adam manages a variety of tax and accounting engagements for business clients in numerous industries, including manufacturing, real estate, construction, alternative investments, and professional services. He has experience in federal tax, multi-state corporate income and franchise tax, and municipal income tax. In addition to his tax compliance background, Adam specializes in preparing and managing complex partnership engagements.