Employer Provided Childcare Credit Has Grown

This credit has been around for a while, but the maximum credit originally was usually not enough to get employer’s attention.

Recently, the OBBBA (One Big Beautiful Bill Act) increased the maximum credit from $150,000 to $500,000. 

So, if you employ workers with young children and have been considering employer-sponsored childcare as a recruiting or retention tool, this is the year to make that happen.

Basically, under Internal Revenue Code 45F, employers can claim a tax credit for qualified childcare expenditures.  Such expenditures can be childcare provided directly by the company for its employees, or contracting with a licensed childcare facility.  There is another activity that qualifies for a smaller credit, called “funding childcare resource and referral services.”

The actual credit is 40% of qualified childcare expenses and the resource and referral credit rate is 20%.  The maximum credit that can be taken is $500,000.

An eligible small business that has gross receipts income of $5 million or less in the prior three years gets an even better deal.  The credit jumps to 50% (and 25% for funding childcare resource and referral services) with a maximum credit of $600,000.

The credit is non-refundable, but any unused credit can be carried forward to future years.

Qualified childcare expenses include:  amounts paid to build, expand, or operate a childcare facility that meets state licensing requirements; amounts paid under a contract with a licensed childcare facility to provide care for employees’ dependents; and amounts paid for childcare resource and referral services.  Note, the facility does not have to be onsite.  The key is that the childcare facility is primarily used to provide childcare to employees’ dependents and not to the general public.

Employers who offer dependent care assistance plans (part of Code section 129 cafeteria plans) can run those plans alongside this credit.  Just remember, you don’t get to double dip.  You can only count the expenses toward one or the other, not both.

Example, a small company (less than $5 million in gross receipts last 3 years) contracts with a licensed childcare center, paying $600,000 annually for reserved spots for employees’ children.  It would get a tax credit of $300,000 (50%).  That means providing a childcare option to employees only costs the company half of what it paid.  Now that is starting to get some attention.

Have you heard?  Psalms 127:3-5 says, “Behold, children are a heritage of Yahweh.  The fruit of the womb is his reward.  As arrows in the hand of a mighty man, so are the children of youth.  Happy is the man who has his quiver full of them.  They won’t be disappointed when they speak with their enemies in the gate.”

Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 775-882-4459.  As well as on our website at BullisAndCo.com. You can also find us on LinkedIn and Facebook.