Tax Benefits to Employers

Although employer-sponsored child care programs frequently require start-up and on-going financial support, employers can take advantage of numerous tax deductions.

Business Expenses

Start-up and investigatory expenses (e.g., advertising, need assessments, consultant services, and staff training) incurred in the development of a new child care center may be amortized over sixty months or more under 26 U.S.C. § 195.
Costs incurred for acquiring, constructing, and/or remodeling a building to be used as a child care center can be depreciated over a thirty-nine year period under the Modified Accelerated Cost Recovery System described in 26 U.S.C. § 168. Costs of equipping the building can be depreciated over varying recovery periods depending on the type of business in which the center is located and the type of equipment. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) allows businesses to receive a tax credit equal to 25% of qualified expenses for employee child care and 10% of qualified expenses for child care resource and referral services for employees. Qualified expenses include costs to acquire, construct, renovate, or expand property that is to be used as part of the child care facility; to operate the facility; to contract with a qualified facility to provide child care services to employees; and to contract to provide child care resource and referral services to the employees. The annual credit limit is $150,000, which means that qualified expenditures up to $600,000 annually will qualify.
Amounts paid by an employer to provide a child care service for employees may be deductible as ordinary business expenses under 26 U.S.C. § 162 as the services reduce absenteeism and turnover, aid in recruitment and retention of employees, and increase employee productivity.
Amounts paid by an employer to a Voluntary Employees’ Beneficiary Association (VEBA) may also be deductible.

Tax-Exempt Organizations

An employer-sponsored child care center may be established as a tax-exempt 501(c)(3) organization. The organization providing child care services must apply to the IRS for tax-exempt status. The employer’s contributions to the center may be deductible as charitable contributions. However, this requires the center to be open to the general public as well. Another option is for the employer to contribute support to an already existing non-profit child care program and deduct those contributions.

Dependent Care Assistance Plan (DCAP)

Dependent Care Assistance Plans (DCAP) provide a pre-tax option for employees. These programs reduce the tax burden of the employer as well. The forms of this benefit can vary according to the type of DCAP. A flexible spending account allows an employee to set aside up to $5000 per year for dependent care expenses under a qualified employer-sponsored program. Other DCAP arrangements may include employer subsidized or employer provided child care and/or voucher programs. The DCAP has an impact on other benefits such as social security benefits and unemployment compensation because it reduces the salary on which these benefits are calculated. Employees must also evaluate the pros and cons of a DCAP versus the IRS Child and Development Care Tax Credit.

Please check with your tax advisor for answers on how your company can take advantage of these programs.