Tax Savings Opportunities for Employer-Provided Childcare

Employee recruitment and retention is a challenging puzzle that many Atlanta companies are still attempting to solve. As the unemployment rate in the metro area continues to decline, from 4% in August 2019 to 2.9% in November 2019, it’s important to review/optimize benefits and compensation packages. While most offer health care insurance, access to retirement plans and college savings plans, many miss an opportunity to captivate potential recruits – employer-provided childcare.

According to a study conducted by Bright Horizons, 95% of participants expressed an increased ability to focus, 87% had higher productivity levels and 79% can volunteer for tasks not formally required. Not only are there productivity gains, but many employers are surprised to learn about the tax credits available to those offering childcare.

To help clients, prospects and others understand the potential savings, Windham Brannon has provided a summary overview.

Federal Tax Savings

U.S. companies considering a childcare benefit should be aware of the tax-saving opportunity available depending on the type of care provided, including:

• On-Site Child Care – Companies offering on-site childcare can receive a federal tax credit for up to 25% of qualifying expenses. The limit on the credit allowed per year is $150,000. In order to qualify for the credit, the program must meet the following conditions;

1. 1. The primary use of the program must be for childcare and should comply with local laws and regulations.
   2. The program must be open to the employees of the company.
   3. Enrollment may not discriminate in favor of highly compensated employees.
   4. At least 30% of the children enrolled must be employee dependents.

The IRS defines qualifying expenses as costs paid to acquire, construct, rehabilitate or extend the property to be used for childcare facilities and costs to operate the program which includes training, program employee compensation, and scholarship programs.

• Contracting Childcare – U.S. companies can also receive a tax benefit if they contract with a qualified childcare facility.  There is a federal tax credit limited to 25% of qualifying expenses with a limit of $150,000 per tax year. A qualified childcare facility is defined as,

1. 1. A facility that meets all applicable laws and regulations including licensing as a childcare facility.
   2. The principal use of the facility must be to provide childcare services (unless the facility is also the personal residence of the operator).
   3. Enrollment of the facility must be open to employees of the company during the tax year.
   4. The use of the facility must not favor highly compensated employees.

• Locating Childcare Services – If neither of the above options can be implemented, there is still a tax-saving opportunity available for businesses that contract with resource and referral agencies. The 10% federal credit is available when the following conditions are met, including;

1. 1. Qualified childcare resources and referral expenses are amounts paid under a contract to provide childcare resources and services to employees.
   2. Activities must be provided in such a way that it does not favor highly compensated individuals.

Georgia Tax Savings

In addition to the federal tax incentives available the state of Georgia is one of the few states that also offers a state tax credit for employer-sponsored childcare. Georgia employers who provide or sponsor childcare services are eligible to receive a state tax credit for up to 75% of direct costs. The credit is limited to 50% of the employer’s total state income liability for any tax year. It’s important to note that any credit claimed, but not used, may be carried forward for five years.

Georgia is one of the few states that offers an additional state tax credit creating an additional incentive for implementing a child care benefit.

Contact Us

There are tax-saving opportunities abound for companies considering employer-provided or sponsored childcare services as an employee benefit. This stands in addition to the enhanced employee productivity and recruitment power of such a program. If you have questions about available tax credits or need assistance with a tax planning or compliance issue, Windham Brannon can help. For additional information, please contact our State and Local Tax Practice Leader, Tim Clancy, at 678-510-2804 or click here to contact us. We look forward to speaking with you soon.