What Is the 45P Employer-Provided Child Care Credit?

The Employer-Provided Child Care Credit, under Section 45F of the Internal Revenue Code, is a federal tax incentive for businesses. Its purpose is to encourage employers to offer child care assistance to their employees, which can involve providing child care facilities on-site or contracting with local providers. By offering this credit, the tax code aims to help address the needs of working parents and increase child care availability. This nonrefundable credit directly reduces an employer’s tax liability but does not generate a refund. As part of the general business credit, any unused portion can be carried back one year or forward for up to 20 years.

Employer Eligibility Requirements

To qualify for the credit, an employer must have incurred specific child care expenditures during the tax year to provide services to its employees. A requirement is that the child care program must not discriminate in favor of highly compensated employees, as defined by the Internal Revenue Code. This means the availability of the facility or service must be on the same terms for all employees.

If the employer’s main business is providing child care, at least 30% of the children enrolled in the facility must be dependents of the employer’s own employees. This rule ensures that the facility genuinely serves the business’s workforce. The facility itself must also comply with all applicable state and local laws, including any licensing requirements.

Qualified Child Care Expenditures

The credit is calculated based on a specific set of costs paid or incurred by the employer. These expenditures fall into distinct categories, and careful record-keeping is required to separate these qualified costs from other business expenses.

Qualified child care facility expenditures

This category includes costs related to the physical space where child care is provided. Expenses for acquiring, constructing, rehabilitating, or expanding a property to be used as a qualified child care facility are eligible. For example, the cost of purchasing a building to convert into a daycare center would be included.

These expenditures also cover operating costs, including employee wages, supplies, and utilities. It also includes expenses for training child care workers, such as providing funds for scholarship programs, and amounts paid to support workers through increased compensation.

Qualified child care services expenditures

This category consists of amounts paid under a contract with a qualified child care facility to provide services to the taxpayer’s employees. For instance, a business that does not operate its own facility can contract with a nearby licensed daycare center to reserve spots for its employees’ children. The fees paid under this contractual arrangement would be considered qualified expenditures.

Qualified child care resource and referral expenditures

These are amounts an employer pays under a contract to provide child care resource and referral services to its employees. Instead of directly providing care, a business might contract with a specialized agency that helps employees find and assess child care options. The fees paid for this service fall into this expenditure category.

Calculating the Credit Amount

The final credit amount is determined by a two-part formula applied to the qualified expenditures. First, the credit includes 25% of the qualified child care facility and services expenditures that the employer paid or incurred during the tax year. This portion covers the costs of building, maintaining, or contracting for child care services.

The second part of the formula adds 10% of the qualified child care resource and referral expenditures. The sum of these two calculations yields the total potential credit for the year, but it is subject to an annual cap. The total credit an employer can claim in a single tax year cannot exceed $150,000.

For example, if a business incurs $500,000 in qualified facility expenditures and $50,000 in resource and referral expenditures, the initial calculation would be (25% of $500,000) + (10% of $50,000). This equals $125,000 + $5,000, for a total of $130,000, which is below the limit and can be fully claimed.

Information and Forms for Claiming the Credit

To claim the credit, employers must use IRS Form 8882, Credit for Employer-Provided Child Care Facilities and Services. Completing this form requires gathering all relevant financial data related to the qualified expenditures. The form has separate lines to enter the total qualified child care facility and services expenditures and the total qualified resource and referral expenditures. The taxpayer then uses these amounts to perform the credit calculation directly on the form, which also applies the $150,000 annual limitation.

How to File for the Credit

After calculating the final credit amount on Form 8882, the form must be submitted as part of the employer’s annual tax return. The credit amount from Form 8882 is carried over to Form 3800, General Business Credit, where it is consolidated with any other applicable business credits.

The total from Form 3800 is then reported on the employer’s primary income tax return, such as Form 1120 for a corporation or Form 1065 for a partnership. Form 8882 must be attached to the tax return to substantiate the claim.