The 45F Tax Credit for Employer-Provided Child Care
April 12, 2023
The 45F Tax Credit for Employer-Provided Child Care
Introduction
A qualified child care facility must generally have child
Many working families across the country struggle to find
care as its principal purpose. The child care facility must
affordable child care. Employer-provided child care is one
also meet all applicable state and local laws and regulations
model that could align the needs of some working families
(including being licensed). If the business claiming the
with the needs of some employers. Families may find that
credit is itself a child care facility, then at least 30% of the
employer-provided care is easier to access, while employers
enrollees at the facility must be the employees’ dependents.
may find that providing child care expands their potential
labor force and improves employee recruitment and
Nonrefundable
retention. Despite the potential advantages of employer-
The 45F credit is nonrefundable, meaning the amount
provided care, a Bureau of Labor Statistics survey found
claimed by a business in a given year cannot be greater than
that about 11% of civilian workers had access to employer-
the business’s income tax liability in that year. However,
provided child care in 2021 and that lower-wage workers
since the credit is generally claimed as part of the general
were less likely to have access than higher-wage workers.
business credit (IRC Section 38), businesses that cannot
(Bureau of Labor Statistics, National Compensation
claim the full value of the credit in a given year can carry
Survey: Employee Benefits in the United States, March
any unused credit amount back 1 year or forward 20 years,
2021, Table 41.)
offsetting past or future taxes.
Policymakers may be interested in tax policy options that
Recapture Provision
incentivize businesses to provide child care for their
Any credit claimed for qualifying child care expenditures is
employees. One existing option is the Internal Revenue
recaptured if the qualified child care facility ceases to
Code (IRC) Section 45F credit. Available data indicate that
operate as a qualified child care facility, or for certain
the 45F credit is rarely claimed, raising questions about
ownership transfers within the first 10 years.
whether the credit is an effective incentive and whether
employers view providing child care as a net benefit.
Interaction with Business Expense Deduction
Under current law, businesses may be able to deduct as a
Calculating the 45F Credit
business expense amounts incurred to provide child care to
The 45F credit allows businesses to reduce their income tax
their employees. For a given amount of child care expenses,
liability by up to $150,000 per year. The credit is calculated
the 45F credit generally provides more tax savings than
as 25% of qualified child care expenditures plus 10% of
simply deducting child care expenses. Businesses may be
qualified child care resource and referral service
able to claim both tax benefits, as shown in the following
expenditures incurred by the business, up to the $150,000
example.
per year limit.
Assume a business incurs $700,000 in costs to contract with
Qualified child care expenditures subject to the 25% limit
a qualified child care facility. The business can apply up to
are
$600,000 of those expenses to the 45F credit since the
credit is capped at $150,000 per year (25% of
the costs of acquiring, constructing, rehabilitating, or
$600,000=$150,000). If the business applies $600,000
expanding property used as a qualified child care
toward the 45F credit, it must reduce the $700,000 in
facility;
expenses by the $150,000 credit when calculating the
the costs of operating a qualified child care facility
amount it can claim as a business deduction ($550,000).
(including training costs, certain compensation for
employees, and scholarship programs); and
The $550,000 deduction, if subject to the corporate rate of
21%, would save the business $115,000 in taxes, which
the costs for contracting with a qualified child care
would be in addition to the $150,000 saved from the credit.
facility to provide child care.
That would amount to a total of $265,000 in tax savings, in
Qualified child care resource and referral service
comparison to tax savings from the deduction alone of
expenditures subject to the 10% limit are
$147,000 (21% of $700,000). (Passthrough businesses such
as sole proprietorships and limited liability partnerships,
expenses incurred to help employees find child care
which are generally subject to the individual income tax,
services.
could see greater tax savings since the marginal rates faced
To be eligible for the credit, the use of a qualified child care
by individuals can be higher than those faced by
facility and the provision of child care resource and referral
corporations.)
services cannot discriminate in favor of highly paid
employees.
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The 45F Tax Credit for Employer-Provided Child Care
Like most credits and deductions, employers generally must
yielding a credit of $30,000 and (2) exclude up to $5,000 of
incur qualified expenditures before receiving these tax
the $12,000 in expenses from the employees’ wages. If an
benefits.
employee were subject to a 22% income tax rate, the
exclusion would reduce their taxes by $1,482.50 ($1,100 in
Legislative History
federal income taxes and $382.50 in Social Security and
The 45F credit was enacted on a temporary basis as part of
Medicare payroll taxes). The amount the employer would
the Economic Growth and Tax Relief Reconciliation Act of
have to pay in its share of payroll taxes would also be
2001 (EGTRRA; P.L. 107-16). It was originally scheduled
reduced by $382.50 per employee. The remaining $7,000
to expire at the end of 2010, but was extended through the
would be considered part of the employee’s compensation
end of 2012 by the Tax Relief, Unemployment Insurance
and subject to income and payroll taxes. The employee
Reauthorization, and Job Creation Act of 2010 (P.L. 111-
would not be able to participate in a dependent care FSA,
312). The provision was made permanent by the American
since the $5,000 in expenses that was excluded from their
Taxpayer Relief Act of 2012 (P.L. 112-240).
taxable income is the maximum amount that can be
excluded under Section 129.
Impact
Available data show that very few businesses claim the 45F
In contrast, if the employer directly paid the child care
credit, indicating that the credit has only a minimal impact
center $7,000 per employee and allowed the employee to
on encouraging employers to provide child care. For
save $5,000 in an FSA, the tax benefit from the exclusion
example, GAO estimated that 169 to 278 corporate business
would be the same to the employee and employer as
returns claimed between $15.7 million and $18.8 million in
discussed above. However, the amount applied toward the
the credit on their 2016 returns. For context, this represents
45F would be $70,000 (10 x $7,000) and the 45F credit
less than 1% of corporate tax returns.
amount would be $17,500 (25% of $70,000).
Among businesses that report their business income on their
Policy Issues
individual owner’s income tax returns (i.e., passthroughs),
The limited number of businesses claiming the 45F credit
GAO estimated that in 2018, 16,846 to 21,378 individual
suggests that the credit may not be effective at encouraging
income tax returns claimed a total of $6.4 million to $8.0
employers to provide child care. Businesses reported to
million in the 45F credit. For context, this represented about
GAO a number of factors that limit the credit’s
3% of individual income tax returns that claimed the
effectiveness, including
general business credit. (Note that the number of returns
does not indicate number of businesses, since in some cases
substantial start-up and long-term costs to providing
multiple partners in a business report their portion of the
child care that the 45F credit does not sufficiently offset;
credit separately on their individual income tax returns.)
difficulties projecting whether enough employees will
The Joint Committee on Taxation has estimated that the
enroll children to make a child care facility feasible;
45F credit will cost a total of $100 million over the five-
year period of FY2022-FY2026 (JCX-22-22).
complexity in navigating regulatory and legal issues
related to operating a child care facility; and
Interaction with Exclusion for Employer-
Sponsored Dependent Care (e.g.,
a lack of employer awareness of the 45F credit.
Dependent Care FSAs)
Congress may consider addressing these issues if it were to
The 45F credit can interact with another employer-provided
modify the 45F credit. Additionally, policymakers may
child care tax benefit—the exclusion for employer-
consider whether employees prefer child care that is tied to
sponsored dependent care.
their employer. Some evidence suggests that families may
favor child care located closer to their homes (rather than
In addition to the 45F credit, employers may provide their
near their workplaces) or services such as home-based
employees with up to $5,000 in tax-free dependent care
(rather than care-based) child care. In light of these issues,
assistance under IRC Section 129. This benefit is often
policymakers may examine whether and to what extent the
provided in the form of a flexible spending arrangement
current credit, or a modified credit, provides a windfall to
(FSA), which is offered to employees as part of a cafeteria
employers who would have provided child care without the
plan. Under a cafeteria plan, employees are offered the
benefit of the 45F credit.
option to set aside a portion of their salary on a pretax basis
for certain qualified expenses, like child and dependent
For more information, see U.S. Government Accountability
care. Because these amounts are excluded from an
Office, Employer-Provided Child Care Credit: Estimated
employee’s wages, they are subject to neither income taxes
Claims and Factors Limiting Wider Use, GAO-22-105264,
nor payroll taxes (i.e., Social Security and Medicare taxes).
February 2022.
For example, assume an employer contracts with a qualified
Margot L. Crandall-Hollick, Specialist in Public Finance
child care facility to provide child care for its 10 employees
Conor F. Boyle, Analyst in Social Policy
and directly pays for $12,000 of each qualified employee’s
child care expenses at that facility. The employer can both
IF12379
(1) apply $120,000 to the 45F credit (10 x $12,000),
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The 45F Tax Credit for Employer-Provided Child Care
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https://crsreports.congress.gov | IF12379 · VERSION 1 · NEW