Fed Tax Incentives:
Employer-Provided Childcare Facilities & Services Credit
Background
I.R.C. § 45F Employer-Provided Childcare Facilities and Services tax credit is a federal tax incentive that can help employers provide child care for their employees. It is general business credit that is equal to 25% of qualified child care expenditures, plus 10% of "qualified child care resources and referral expenditures," with the resulting credit capped at $150,000 per tax year. See I.R.C. §§ 45F(a), (b).
In general, enrollment in the facility must be open to employees of the taxpayer, and its use (as well as provision of resource and referral services) must not discriminate in favor of highly compensated employees (as defined under Sec. 414(q)). See I.R.C. § 45F(c)(2)(B)(i), I.R.C. § 45F(c)(3)(B). If the facility is the taxpayer's principal trade or business, at least 30% of its enrollment must be dependents of employees of the taxpayer (I.R.C. § 45F(c)(2)(B)(ii)).
As additional background, further details regarding calculation mechanics, definitions, and authority are listed below.
Credit Calculation Summary
In general, qualified childcare expenditures (I.R.C. § 45F(c)(1)) include the following:
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operating costs of a qualified child care facility of the taxpayer, including costs related to the training of employees, to scholarship programs, and to the providing of increased compensation to employees with higher levels of child care training (I.R.C. § 45F(c)(1)(A)(ii));
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contract expenditures with a qualified child care facility to provide child care services to employees of the taxpayer I.R.C. § 45F(c)(1)(A)(iii);
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qualified child care resource and referral expenditures are amounts paid or incurred under a contract to provide childcare resource and referral services to an employee of the taxpayer (I.R.C. § 45F(c)(3)).
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I.R.C. § 45F(c)(3)(A) states the term “qualified child care resource and referral expenditure” means any amount paid or incurred under a contract to provide child care resource and referral services to an employee of the taxpayer.
I.R.C. § 45F(c)(3)(B) provides the services shall not be treated as qualified unless the provision of such services (or the eligibility to use such services) does not discriminate in favor of employees of the taxpayer who are highly compensated employees (within the meaning of section 414(q)).
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amounts paid or incurred to acquire, construct, rehabilitate, or expand property (I.R.C. § 45F(c)(1)(A)(i)); and
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which is to be used as part of a qualified child care facility of the taxpayer (I.R.C. § 45F(c)(1)(A)(i)(I)),
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with respect to which a deduction for depreciation (or amortization in lieu of depreciation) is allowable (I.R.C. § 45F(c)(1)(A)(i)(II),
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which does not constitute part of the principal residence (within the meaning of section 121) of the taxpayer or any employee of the taxpayer, (I.R.C. § 45F(c)(1)(A)(i)(III)); and
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“qualified child care expenditures” shall not include expenses in excess of the fair market value of such care (I.R.C. § 45F(c)(1)(B)).
I.R.C. § 45F(c)(2) states the term “qualified child care facility” means a facility—
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the principal use of which is to provide child care assistance, and
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which meets the requirements of all applicable laws and regulations of the State or local government in which it is located, including the licensing of the facility as a child care facility. § 45F(c)(2)(A)(i) shall not apply to a facility which is the principal residence (within the meaning of section 121) of the operator of the facility.
However, I.R.C. § 45F(c)(2)(B) states a facility shall NOT be treated as a qualified child care facility with respect to a taxpayer unless—
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enrollment in the facility is open to employees of the taxpayer during the taxable year,
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if the facility is the principal trade or business of the taxpayer, at least 30% of the enrollees of such facility are dependents of employees of the taxpayer, and
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the use of such facility (or the eligibility to use such facility) does not discriminate in favor of employees of the taxpayer who are highly compensated employees (within the meaning of section 414(q)).
Recapture Of Acquisition And Construction Credit (I.R.C. § 45F(d))
If, as of the close of any taxable year, there is a recapture event with respect to any qualified child care facility of the taxpayer, then the tax of the taxpayer under this chapter for such taxable year shall be increased by an amount equal to the product of—
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I.R.C. § 45F(d)(1)(A) — the applicable recapture percentage, and
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Applicable Recapture Percentage (I.R.C. § 45F(d)(2)). In general, the applicable recapture percentage shall be determined from the following table listed below. Year 1 shall begin on the first day of the taxable year in which the qualified child care facility is placed in service by the taxpayer. See I.R.C. § 45F(d)(2)(B). If the recapture event occurs in the applicable years, the applicable recapture percentage is:
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Years 1-3: 100%
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Year 4: 85%
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Year 5: 70%
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Year 6: 55%
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Year 7: 40%
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Year 8: 25%
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Years 9 and 10: 10%
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Years 11 and thereafter: 0%
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I.R.C. § 45F(d)(1)(B) — the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted if the qualified child care expenditures of the taxpayer described in subsection (c)(1)(A) with respect to such facility had been zero.