It’s certainly not news to you: There is a severe labor shortage in the manufacturing sector. In fact, according to the National Association of Manufacturers, nearly 2.1 million manufacturing jobs could be open by 2030. One way to attract and retain top talent is to provide an impressive slate of employee benefits. One such benefit is childcare. And manufacturers may be able to offset some of the costs with a valuable tax credit. Here’s how it works.

The basics

The Section 45F employer-provided childcare credit is part of the general business credit, which is composed of more than 30 separate tax credits that are subject to combined limits based on your tax liability. To calculate and claim the credit, a business files Form 8882Credit for Employer-Provided Childcare Facilities and Services.

The credit is equal to 25% of an employer’s qualified childcare facility expenditures plus 10% of its qualified childcare resource and referral expenditures paid or incurred during the tax year. It’s limited to a total of $150,000 per tax year.

Facility expenditures

Qualified childcare facility expenditures are amounts paid:

  • To acquire, construct, rehabilitate or expand property that’s 1) to be used as part of a qualified childcare facility of the taxpayer, 2) depreciable or amortizable, and 3) not part of the principal residence of the taxpayer or one of the taxpayer’s employees;
  • To operate a qualified childcare facility of the taxpayer, including expenses for training, scholarship programs and increased compensation for employees with childcare training; or
  • Under a contract with a qualified childcare facility to provide childcare services to the taxpayer’s employees.

To qualify, expenses must not exceed the fair market value of the childcare provided. A qualified childcare facility is one that meets all state and local regulatory requirements and:

  • Is used principally to provide childcare (unless it’s also the personal residence of the person who operates it),
  • Is open to all of the taxpayer’s employees during the tax year, and
  • Doesn’t discriminate in favor of highly compensated employees.

In addition, if the facility is the taxpayer’s principal trade or business, at least 30% of enrollees must be dependents of the taxpayer’s employees.

Special rules and restrictions

Qualified expenditures are amounts paid under a contract to provide resource and referral services to help a taxpayer’s employees find childcare. To avoid double benefits from the same expenditures, the taxpayer must reduce its basis in any qualified childcare facility by the amount of the credit attributable to facility-related expenditures. The taxpayer must also reduce other deductions or credits that are based on the same expenses.

Taxpayers may have to recapture (pay back) some or all of the credit if a qualified childcare facility ceases to operate as such, or undergoes a change in ownership, before the 10th tax year after the tax year in which it’s placed in service. The percentage of the credit that must be recaptured decreases gradually over the 10-year period.

Valuable recruiting tool

As employers compete for a shrinking labor pool, employer-provided childcare can be an attractive perk for current and prospective employees. The Sec. 45F tax credit can help reduce the cost of this benefit. Contact us with any questions regarding this tax credit.

© 2023

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