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Form 8882: Guide to employer-provided childcare tax credit

Susan Turcotte

• 13.09.24 • 5 min read

Illustration three kids in a nursery school setting, yellow background

Competitive compensation is not enough to attract top talent. Businesses should now consider providing attractive employee benefits to hire and retain highly skilled professionals.

If you have employees with young children, employer-provided childcare is one of the benefits that they might highly value. The IRS recognizes the importance of this support and offers the employer-provided childcare tax credit to compensate for it.

This guide will explain everything you need to know about the credit, its benefits, and how to claim it.

What is the employer-provided childcare credit?

Employer-provided childcare credit is a general business credit that allows businesses to claim a portion of their childcare-related expenses.

The credit consists of two components:

25% credit for qualified childcare facility expenditures – costs related to acquiring, constructing, rehabilitating, or expanding a qualified childcare facility.
10% credit for childcare resource and referral services – expenses related to helping employees locate childcare services through third-party providers.

Businesses can claim a maximum credit of $150,000 each year.

This tax credit reduces the employer's tax amount dollar-for-dollar, making it an attractive option for companies aiming to decrease their federal tax burden and improve their financial standing.

Also read. Work Opportunity Tax Credit for employers and employees

Who is eligible for the credit?

Any employer that provides childcare services to employees is eligible for the credit, provided they incur qualified childcare costs during the tax year.

Eligible businesses include those that directly operate childcare facilities or contract with third-party providers to offer childcare or referral services to their employees.

You can qualify for this credit in one of these three ways:

Provide employer-sponsored childcare. Expenses related to purchasing, building, renovating, or enlarging property for employee childcare and eligible operating costs can be included.
Contract with a childcare program. Costs under this section encompass those required to engage a certified childcare center that will offer childcare assistance for your staff's children.
Contract for research and referral. You can include the costs of contracting with an entity that will provide research and referral services to help employees find childcare.

If you provide on-site childcare services and if the children of your employees make up at least 30% of your program's enrollment, you qualify as an eligible employer and can claim this credit.

If the employer wants to claim a tax credit for providing child care as an employee benefit, the childcare program must be accessible to all employees and should not show preference to any group, including highly compensated employees.

Not sure if your business qualifies for this tax credit?

Talk to a tax professional

What are the qualified childcare costs?

Let's break down the qualified childcare costs:

Facility construction and expansion: expenses incurred to acquire, construct, or expand a qualified childcare facility, such as a daycare facility, a nursery school, or a private school.
Operating expenses: costs associated with running the facility, such as paying for staff training, providing scholarships, and offering higher compensation to childcare professionals with advanced training.
Referral services: fees paid to third-party contractors for childcare resource and referral services, which help employees find childcare solutions.

NOTE

The expenses for constructing and expanding facilities can only be included if the facilities are located outside the taxpayer's primary residence. Consequently, sole proprietors running home-based programs are likely not eligible for the credit.

What qualifies as a childcare facility?

To be considered a qualified childcare facility, the following criteria must be met:

Compliance with local laws: The facility must adhere to all applicable state and local regulations, including proper licensing as a childcare facility.
Primary use: The facility's primary function must be to provide childcare services.
Non-discriminatory use: The facility must be available to all employees.

NOTE

The aggregate costs included must not exceed the reasonable market value of the childcare center.

How to claim the credit with Form 8882

To claim the employer-provided childcare credit, businesses must fill out and file Form 8882. This form details the expenditures incurred and calculates the credit amount.

Taxpayers who receive this credit solely from pass-through entities such as S corporations, partnerships, estates, or trusts can report the credit directly on Form 3800.

Businesses can claim the credit any time within three years from the due date of their tax return, either on an original or amended return.

Also read. Form 8941: Small Employer Health Insurance Premiums Credit

Before claiming the credit, consider the limitations of the credit and special rules that may apply:

No double benefit: Businesses cannot claim childcare credit and a deduction for the same expenses. The amount of the credit must reduce the basis of any property used for the facility.
Recapture provisions: Recapture may be triggered within ten years of a facility ceasing to operate as a qualified childcare facility or if there is a change in ownership. Recapture can be avoided if the acquiring party agrees to assume the liability.
Grouping rules: Members of a controlled group of corporations or businesses under common control must calculate the credit as a single taxpayer. Each entity within the group claims its share of the credit, and a statement must be attached showing how this share was determined.

To get personalized advice on the employer-provided childcare tax credit, talk to a TFX tax professional. Our tax experts can help you understand the eligibility requirements, consult on credit calculations, and fill out all the required forms to claim the credit with the IRS.

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Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Always consult with a tax professional regarding your specific case.