Employer-Provided Child Care Credit

May 08, 2012

In order to encourage businesses to provide child care for their employees, Congress has recently created a tax incentive for those employers who make certain qualified child care expenditures. The amount of the credit allowable in a tax year is the sum of 25 percent of qualified child care expenditures plus 10 percent of qualified resources and referral expenditures. The credit is limited to a maximum of $150,000 for any tax year.

Qualified Child Care Facility

In order to qualify as a child care facility giving rise to a tax credit, the facility must be one whose principal use is to provide child care assistance. It must meet the requirements of all applicable state and local laws, including any licensing requirements. The principal use requirement can be waived if the facility is located in the principal residence of the operator of the facility.

A child care facility will only be qualified for the purpose of the tax credit if three requirements are fulfilled. First, enrollment in the facility must be open to the taxpayer's employees during the tax year. Second, if the facility is the taxpayer's principal trade or business, at least 30 percent of the enrolled children must be dependents of the taxpayer's employees. Finally, the use of the child care facility cannot discriminate in favor of highly-compensated employees.

Qualified Child Care Expenditures

In order to qualify for the credit, expenditures must be incurred: to acquire, construct, rehabilitate or expand property used as a taxpayer's qualified child care facility; for the operating costs of a qualified child care facility, including the costs related to employee training, scholarship programs, or providing compensation for employees with high levels of child care training; or under a contract with a qualified child care facility.

Recapture of Acquisition and Construction Credit

If a taxpayer terminates the operation of his qualified child care facility or changes its ownership during a tax year, a recapture event has occurred. In that case, the tax liability of that tax year must be increased by an amount determined by a recapture calculation established under the Internal Revenue Code. The recapture calculation is limited to those amounts that were actually claimed to reduce the taxpayer's liability.

An event that triggers a casualty loss with respect to a qualified child care facility is not a recapture event unless the qualified facility is not replaced within a reasonable period of time. 

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.