Introduction

One of the truest and most universal joys in the world is having a child. The immaculate happiness they create is only slightly hampered when you start looking at your statements and quickly realize how many new expenses you have accrued, with the main cost often being childcare. According to Care.com, the average cost of a daycare in 2023 was $1,136/month for a single child. With the median household income being $83,730, or $6,977.50/month, that would mean 16% of your monthly income is going to go towards daycare alone. That doesn’t even include meals, housing, diapers, healthcare costs, new clothes every few months, and the laundry list of other expenses to take care of. That number is only exacerbated if you have more than a single child that needs daycare!

Luckily, there is a way for businesses to help shoulder those costs and potentially entice highly qualified individuals to join their business when they might otherwise decide to stay home to avoid the high costs of childcare (according to Census.gov, 35% of parents with young children report they didn’t work because they needed to take care of their child.) The Employer-Provided Childcare Credit can provide businesses up to $150,000 of tax credit per year. If you are offering your employees a facility for their kids or offer resources and referrals to a qualified childcare facility, then you may be eligible for this credit.

Requirements to be a Qualified Childcare Facility Provider:

1. The facility must primarily be used to provide childcare unless the facility is also the principal residence. If that is the case, then at least 30% of the enrollees of the facility must be dependents of employees.
2. Enrollment must be open to employees during the taxable year.
3. The use of the facility can not discriminate in favor of highly compensated employees.
4. Must be a depreciable (or amortizable) property.
5. Can not be part of the principal residence of the owner or any employee.

Eligibility of qualified childcare expenditures includes:

1. Costs for purchasing, constructing, or improving property that will be used as a qualified childcare facility.
2. The cost of operations to run the facility which includes training employees, providing scholarships, and increasing compensation for employees with higher levels of childcare training.
3. Qualified resource and referral expenditures that are paid or incurred through a contract to provide childcare resources or referrals to your employees.

How much can you claim?

For qualified childcare facility expenditures, you can claim a credit of 25% of the costs and for resource and referral expenditures you can claim a credit for 10% of the costs. You are able to claim up to $150,000 for any taxable year.

As an example, let’s say you purchase a facility for $100,000 and you hire a childcare worker for $40,000/year. Because these are qualified childcare facility expenditures, you would be able to claim $35,000 ($140,000 * .25)

You are not allowed a double benefit and so if you use the credit, you will have to reduce the basis of the qualified childcare facility and other business deductions and credits.

Conclusion

The Employer-provided Childcare Credit is a great way to help your workers at a time when childcare costs are prohibitive. By helping relieve parents of the stress of knowing their child is safe and taken care of, you are in a better position to have better retention rates and hire more qualified candidates. Even if you aren’t able to build a new facility or hire professionals to take care of the kids, you can still help employees relieve the costs by referring. To claim the credit, you would use Form 8882 which walks you through how to calculate how much of a credit you will receive. You could also reach out to Volpe Consulting & Accounting and have our team of experts help you get the best possible credit!