Fifty-seven percent of parents say that childcare responsibilities impact their ability to work. Offering childcare benefits increases employee retention, loyalty, productivity, and workplace environment. Despite these statistics, only 11% of workers have access to childcare benefits.
Are you aware that the federal government offers an employer childcare tax credit? The credit is available for helping employees receive affordable childcare.
Use Form 8882 to claim a tax credit for the costs of providing childcare facilities and services to employees.
Keep reading for more information. We will share how to apply, what expenses qualify, and how to claim credit for prior years.
What Is Form 8882?
A tax credit is available for qualifying childcare facilities, referrals, and resource expenses. The credit is part of the general business tax.
You can claim it any time within three years of your tax return due date. You may receive credit on your original return or by filing an amendment.
The rules regarding the Employer-Provided Child Care Credit, Form 8882, are in Internal Revenue Code §45F. Employers can receive up to 25% of qualifying childcare costs. They can also claim 10% of childcare resources and referral expenses.
The maximum allowable credit is $150,000 per year. A total expenditure of about $430,000 is necessary to receive full credit. Besides the federal tax credit, 18 states offer tax credits for employer-provided childcare.
All businesses other than S corporations, partnerships, estates, and trusts must complete Form 8882. The credit is available to the other entities, but they report it on Form 3800.
Increases Employer Tax Savings
Combining the Employer-Provided Child Care Credit with a business expense deduction provides higher tax savings. You deduct the cost of providing child care to employees as a business or trade expense.
If you incur qualifying childcare expenses, you can also claim that credit. You deduct part of those costs as business expenses.
You report the credit as part of your general business credit. This offsets your federal income tax liability and is not refundable in the current tax year.
You must reduce any childcare expenses you deduct as a trade or business expense from the amount you claim as a childcare expense credit. Any credit you do not use you can carry back one year or forward for up to 20 years. Duplicate deductions are not allowed.
Claiming credit and deducting any remaining expenses as qualifying childcare expenses saves taxes. Here’s an example of tax savings for a business filing taxes with and without the child care credit.
Employers can save taxes by claiming credit and deducting any remaining expenses by claiming any qualifying childcare expenses as a credit.
An employer with qualifying childcare facility expenses has a total tax benefit of $328,500 and an after-tax cost of $671,500.
Using only the business expense deduction without the childcare credit, the employer has a total tax benefit of $210,000. The after-tax cost is $790,000.
This example shows what significant savings this can be for your business.
Qualifying Child Care Expenditures
Businesses large enough to justify onsite daycare may deduct the following:
- Costs from expanding property for use as a daycare
- For acquiring, rehabilitating, or expanding property for daycare use
- For supporting childcare workers through scholarships, training, and wages
The Child Care Facilities Credit allows employers to claim credit for contracting with licensed child care programs. This includes home-based programs providing service to employees.
Many businesses partner with childcare companies. Participating childcare organizations include Bright Horizons, KinderCare, and Learning Care Group. The expenses for the childcare benefit cannot exceed the fair market value of the care.
The business must comply with all laws and regulations of the state and local government, including licensing requirements, to qualify as a childcare facility. The following conditions must be met:
- The principal use of the facility is to provide childcare (unless also personal residence)
- Enrollment is open to employees of the taxpayer during the current tax year
- Use of the facility must not discriminate in favor of highly compensated employees
- At least 30% of enrollees must be dependents of employees of the taxpayer if the facility is the principal business of the taxpayer
Helping employees find childcare qualifies as a resource and referral expense. This service must be available to all employees within the company to receive credit. It cannot be exclusive to those who make higher wages or are at a specific employee rank.
You must reduce any qualifying childcare facility costs by the amount of the credit you attribute to facility-related expenses. You must also reduce other credits or deductions that use the same expenses. You cannot claim double benefits for the same costs.
Use a business tax credit specialist to ensure that all your expenditures meet requirements and that there are no duplicate claims. They can help you calculate your credit and make sure you claim all credits you qualify to receive.
Recapture the Credit
You may need to recapture all or part of the credit if the following takes place within ten years of the daycare providing service:
- Your qualifying childcare ceases to operate
- There is a change in ownership
Recapture is not necessary if new owners of the facility agree, in writing, to assume the recapture liability.
Recapture tax goes onto the line of your tax return where you report other recapture taxes. You cannot use the recapture tax to figure out any credit or determine the alternative minimum tax.
Claim Credit for Current and Prior Years
To claim the childcare business credit, you must complete Form 8882. You then attach it to Form 3800, General Business Credit. You then attach both forms to your business tax return.
You can still receive your employer’s childcare credits if you have not requested them. There is a three-year period from the date of your original tax form filing to file an original or amended return.
Contact a business tax credit specialist today if you believe you qualify for business tax credits you have yet to claim. ERC Today can help you compare tax credits you are eligible for and assist you in completing the necessary forms.
Form 8882 Impact on Employee Taxes
When you provide your employees with childcare, it is a fringe benefit. You exclude this expense from an employee’s taxable income if you make it available to all eligible employees. The tax exclusion is a reduction to the employee’s tax burden.
Your employee must declare the workplace-provided childcare on their tax return. They claim their children as dependents, and that childcare is necessary for them to work.
If your employee’s childcare costs exceed the $5,000 exclusion limit, they may be able to claim the child and dependent care credit.
Help With Business Tax Credits
A shrinking labor pool and remote work make offering a workplace childcare facility benefit an attractive perk for prospective and current employees. Let us help you apply for all employee tax credits you receive using Form 8882.
ERC Today assists with processing numerous employer tax credits. Call us today at (833) 469-0939 to learn what we can do for you.