Introduction

As an individual and a small business owner, you are familiar with the tax system. As a child care business owner, you understand the necessity to maximize every dollar to put back into your program to improve the lives of children, your staff, and yourself so that you can continue to provide services that the country depends on.

There may be some goals on your agenda such as offering staff benefits or performing home improvements to boost your program’s quality, but you may believe these items are cost-prohibitive. But in fact, there are tax credits that you can benefit from as you implement certain benefits and improvements within your child care business. Tax credits are a useful tax savings tool as they offer dollar-for-dollar reductions in your tax liability. In this guide, we will discuss some key tax credits that child care businesses can and should be sure to look into.

Pandemic-related Tax Credits

The federal government offered tax credits for businesses who were impacted by the COVID-19 pandemic. The eligible period for the credits began March 13, 2020 and businesses can still claim them retroactively.

The Employee Retention Tax Credit (ERTC) allows eligible businesses that were impacted by the pandemic who continued to pay their W-2 employees to receive a credit of 50% in 2020 and 70% in 2021 for wages paid out to staff. The maximum credit for 2020 is $5,000 per employee and $21,000 per employee in 2021. Read our ERTC guide for more details on this valuable credit.

Families First Coronavirus Response Act (FFCRA) allows sole-proprietors and businesses with employees to receive reimbursement for paid sick leave that was offered to staff who were out for pandemic-related reasons. This also covers program closures due to COVID-19 exposures. Businesses can receive reimbursement for up to 40 hours of paid sick leave from March 13, 2020 – March 31, 2021 and up to 40 hours for April 1, 2021 – September 30, 2021. Read our FFCRA guide for more details on this valuable credit.

Tax Credits for offering Staff Benefits

Health Insurance

Small businesses can benefit from the Small Business Health Care Tax Credit that will reimburse you for half of your contributions toward your employee’s premiums as long as you cover at least 50% or more per employee. There are other guidelines that you must meet, which in most cases a typical small-to-midsize child care business would. For example, if an employee’s monthly premium is $235 and you pay 50% of that, you would be eligible for a tax credit of $58.75. That translates to annual costs of $1,410 for you, however, you would receive back $705 when you file your return.

For more information, visit the Small Business Health Options Program (SHOP) website. There, you can find an example of starting costs for health care insurance plans based on your location. Remember:

These figures do not include dependents. If you choose to cover dependents’ premiums as well, these costs will rise.
Costs can be much greater than those estimated on the site based on your circumstances and selections.

Pro-tip: Maximize your savings by claiming the tax credit and deducting your expenses for staff benefits!

Retirement

Small businesses that start up a retirement plan can benefit from the Setting Every Community Up for Retirement Enhancement (SECURE) Act tax credit. Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the setup and administrative fees associated with starting a SEP, SIMPLE IRA, or 401(k) plan. Learn more here and be sure to talk with your tax professional about this tax credit opportunity.

Pro-tip: Maximize your savings by claiming the tax credit and deducting your expenses for staff benefits!

Paid Family and Medical Leave

Employers may claim the Employer Credit for Paid Family and Medical Leave, which is equal to a percentage of wages they pay to qualifying employees while they’re on family and medical leave. This credit is available through 2025. Qualified paid medical and family leave includes:

Birth of an employee’s child and to care for the child.
Placement of a child with the employee for adoption or foster care.
To care for the employee’s spouse, child, or parent who has a serious health condition.
A serious health condition that makes the employee unable to perform the functions of his or her position.
Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
To care for a service member who is the employee’s spouse, child, parent, or next of kin.

The credit that the business receives is based on the percentage of wages that you pay the employee while on leave ranging from 12.5% to 25%. To learn more, click here.

Tax Credit for Hiring Staff that belongs to a Targeted Group

The Work Opportunity Tax Credit

Businesses can receive a tax credit for hiring staff that belong to specific targeted groups. Historically, those in the targeted groups have faced employment barriers and by employing them, you are helping to alleviate those barriers and contribute toward their economic stability. This credit is only for new hires and you must request and receive certification that the person belongs to a targeted group.

Someone is a member of a targeted group if he or she began working for you before 2026 and is a:

Long-term family assistance recipient,
Qualified recipient of Temporary Assistance for Needy Families (TANF),
Qualified veteran,
Qualified ex-felon,
Designated community resident,
Vocational rehabilitation referral,
Summer youth employee,
Supplemental Nutrition Assistance Program (SNAP) benefits (food stamps) recipient,
SSI recipient, or
Qualified long-term unemployment recipient.

To qualify for the credit, you must complete Form 8850, which is the request for certification. There is a portion for you to complete and for the employee to complete. After you both sign the form, you will send it to your state’s workforce agency, Texas Workforce Commission by the 28^th day following the hiring. The credit ranges from $1,200 to $9,600 depending on the target group the employee belongs to.

Tax Credit for Employer-Provided Child Care Facilities and Services

For 20 years, the federal government has offered a tax credit to encourage businesses to offer child care benefits to their employees. The Employer-Provided Child Care Facilities and Services credit allows businesses to receive a valuable tax credit of 25% of related child care expenses and 10% of their resource and referral expenses, up to a total of $150,000.

To be eligible for this credit, a business has the following options for offering employer-provided child care:

Providing On-Site Care for Employees: This includes expenses to acquire, construct, rehabilitate, or expand a property to provide child care to employees, as well as qualified operating expenses for such child care services.
Contract with a Child Care Program: Expenses in this category include those needed to contract with a qualified child care facility that will provide child care services to the children of employees.
Contracting for Research and Referral: This includes costs to contract with an entity who will provide research and referral services, to help employees find child care.

If a child care business seeks to claim this tax credit for service offered to its own employees, then at least 30% of enrolled children must be employees’ dependents. For example, if your child care program has 20 enrolled children, at least six children (30%) must be dependents of your employees for your business to be eligible to claim the credit.

Pro-tip: Share information about this credit with businesses that you would like to form a possible partnership with to offer care for their employees. It’s a win-win!

Tax Credits for Home Owners (family child care providers)

NEW in 2022!

To support clean energy, the Inflation Reduction Act will extend and expand tax credits for certain energy-related home improvements. This may include energy-efficient:

Solar panels
Water heaters
Heat pumps
HVAC systems
Windows
Doors
Appliances
And more!

Starting in 2023, the Energy Efficient Home Improvement Credit will be equal to 30% of total energy efficient improvement costs made throughout the year up to a maximum credit of $1,200.

The Residential Clean Energy Credit offers a 30% credit on the cost to install certain systems that use solar, wind, geothermal, biomass or fuel cell power to power your home, heat water, or regulate the temperature in your home.

Updates are underway for this new tax law, continue to check Energy Star for guidelines and updates.

What should I do next?

After researching these opportunities, be sure to talk with your CPA or tax professional about these can work for your business. You also have access to speak with a free business coach to answer some of your questions.

This explainer is not meant to provide tax, legal, or accounting advise. Please consult with your attorney or tax preparer for more information and guidance pertaining to your particular circumstances.

Tax Credits for Child Care Business