The Internal Revenue Service (IRS) has set up an online resource on Employer-Provided Childcare Tax Credit, a program incentivizing businesses to provide childcare services to their employees.
On Wednesday, the IRS launched a new page detailing information regarding the credit. “We’ve heard that some employers may be overlooking this important credit, so the IRS has created a new one-stop shop for information on IRS.gov that provides an easy place to learn more,” said IRS Commissioner Danny Werfel, according to a Feb. 7 press release.
The credit is designed to incentivize employers to offer childcare services to workers by covering a part of such costs. According to IRS regulations, the credit is limited to $150,000 per year and can be used to offset 25 percent of childcare facility expenditures and 10 percent of related expenditures.
A qualified childcare facility must be principally used to provide child care assistance, with the enrollment opened for employees during the tax year for which the credit is sought. In addition, the facility must not be used in favor of highly compensated employees of the business.
Once a childcare facility qualifies for credit, expenditures that are eligible for the credit include money spent on acquiring, constructing, rehabilitating, or expanding a property to be used as the childcare facility.
Such properties should be depreciable or amortizable, and should not be part of the principal residence of the business owner or an employee of the business.
Qualifying expenditures also include money spent on “training employees, providing scholarship programs, and providing increased compensation to employees with higher levels of childcare training.”
Any qualified childcare facility expenses with costs marked higher than the fair market value of such care will not be considered for the credit.
Childcare Services for Employees
According to an April 2020 paper published by the Becker Friedman Institute, 32 percent of American workers had children under 14 in their households. This accounted for 50 million employees who often have to take into consideration childcare obligations after returning from work.Almost a third of the 50 million employees had a child under the age of six years, indicating they required a higher level of childcare service.
A February 2022 report from the U.S. Government Accountability Office (GAO) revealed that $144.7–154.8 million worth of qualified childcare facility expenses were reported in corporate returns in 2018.
“For employers, the credit can offset actual federal income tax liability,” the report noted. However, “selected groups that review employers, workers, and families, and child-care issues told GAO several factors limit employers’ use of the credit.”
“For example, several groups said that building and operating on-site child care entails substantial costs, and planning and administering on-site child care can be complex. These groups also said employers are often unaware of the credit and that it may be too small, in relation to the costs, to sufficiently incentivize employers to provide child care.”
The GAO said the groups suggested boosting outreach and education as well as redesigning the credit. They recommended increasing the portion of business expenses that can be offset as well as raising the maximum allowable credit.
“Groups GAO interviewed also described various benefits of the employer-provided child care services eligible for the credit, such as employees’ increased productivity and engagement. However, some noted that such services may not be accessible to all employees, such as shift workers, and may not be affordable even when employer-subsidized.”
The report pointed out that there were 1.4 million fewer women in the workforce as of November 2021 compared to the beginning of the pandemic in February 2020.
“Some research has attributed this reduction to limited access to or availability of child-care services during the pandemic, among other factors,” it said.
Only around 11 percent of all workers had access to employer-provided childcare, GAO said citing a 2021 analysis from the Bureau of Labor Statistics. “Those with lower incomes were less likely to have access.”
A document issued by the think-tank Bipartisan Policy Center (BPC) in November 2022 said that less than 0.01 percent of American businesses which filed for general business expense credits calmed the Employer-Provided Child Care Credit. “Take-up is low,” it stated.
BPC recommended that Congress make the tax credits fully refundable. It also asked lawmakers to explore developing a tiered system of credits where smaller employers would receive higher credit rates and maximum possible benefits.
The group asked Congress to make “all employer-provided child care benefits exempt from the gross income tax (of individual taxpayer), similar to health care benefits.” This would ensure that employees can continue maintaining eligibility for other credits like the Earned Income Tax Credit and the Child Tax Credit.
“Congress should allow employees to claim the Child and Dependent Care Tax Credit (CDCTC) up to the maximum allowable expenses for any out-of-pocket child care expenses, regardless of employer contribution,” the BPC said. Lawmakers must “ensure that employer-provided child care does not create undue burdens on families.”
