Episode 10: $150K to $2M Childcare Tax Credit Proposal – Too Good to Be True?

On our 10th episode of the Childcare Tax Break Breakdown we discuss a potential new bill introduced at the federal level, the Child Care for American Families Act, H.R. 8540. The bill aims to enhance the Employer Child Care Tax Credit, increasing the general percentage for qualified childcare expenditures to 40%. For small businesses with 500 or fewer employees, the bill proposes a 50% credit on expenditures. The bill also sets a cap at 60% of expenditures for rural and low-income areas, incentivizing employers to offer more childcare services. Additionally, the bill suggests increasing the annual cap on qualified expenses to $2 million and the total credit to $1.2 million. Businesses could claim the credit by pooling resources for childcare facilities, encouraging collaboration among small businesses. The bill's potential impact could significantly reduce the cost of childcare benefits programs for employers, making it more accessible and affordable. Greg and Doug highlight the importance of tracking this bill and other similar initiatives across states to support childcare affordability and accessibility.

Chapters

• 0:02 Child Care Tax Credit Breakdown
• 17:23 Colorado Tax Credit Benefits Conversation

Transcript

Speaker 1: 0:02

Welcome to the Tax Break Breakdown with your hosts, greg and Doug. Sit back and relax while they review current and upcoming child care tax credit programs employers can take advantage of. Now on to the show.

Speaker 2: 0:17

Every time, Everybody welcome to the Child Care Tax Break Breakdown with your hosts, Greg and Doug. This is a special episode. Dun-dun-dun, dun-dun-dun. We're going to put some highlight music Graphics? Yeah, but before we begin, Doug, how are you? How was your last couple weeks? You've been on the road.

Speaker 1: 0:46

I've been flying all over the country to talk childcare benefits with governments and employers, and the interest just seems to keep going up, which is amazing, as do my airline points, which is great, and my fatigue, which is not as great, but it's a uh, it's a worthy cause and it's why we do what we do. So all good things.

Speaker 2: 1:08

And that's why I'm I am doing good, I'm trying to um, I'm trying to catch myself when you say you're good but you're exhausted.

Speaker 1: 1:21

Um.

Speaker 2: 1:22

I mentioned it being up really late. No, not not being up, going to be up early, but being up really early. And um, you know, I've I've mentioned before my wife is pregnant, our, our kiddo, is coming in 50 days or so. So this is number three we had our um, my sister sorry, my wife's sister out for the last 10, 11 days and she had just left today and it was so nice to have her here because she helped all around.

Speaker 2: 1:58

Yeah, and when she left it everything sat in like settled in like it's my wife and I and the you know, the three kids and the two dogs like child care. I was like can you just stay? If I can get money, will you stay, because that it's.

Speaker 2: 2:18

You know, I think that, uh, this is that's why we do what we do as well. I think some people are not in that fortunate position, but now moving to three kids is going to be the next challenge in life Zone defense. So the emergency session today is because a couple days ago there was a new bill that was introduced. This is at the federal level, so we talk on this podcast about tax credits, tax grants from states, from federal, obviously, the federal ones. I think there is one that exists today that not many people know about and it's called Form 8882, the Employer Child Care Tax Credit. That's been baked into the IRS code for many, many years and how that one works. It's Code Section 45F, but the form is 8882. And I think one of our first episodes, doug, you were like this is the simplest IRS form I've ever seen.

Speaker 1: 3:23

The only IRS form I like. It's the LibR to Clear. It's one page.

Speaker 2: 3:32

I think there's more instructions than there are lines, A lot. Yeah, that one. For those that don't know if you're a tax-paying entity in the US that files federal taxes, you can get a credit up to $150,000 a year for qualified child care expenses and it's broken out into two categories. One is child care resource and referral costs. So that would be like a navigation service, a self-serve portal, those types of services that help match you get 10% of what you spend there. So if you spend $100,000, you get $10,000 credit. Then you can get 25% of qualified child care expenditures, such as building a facility, paying for tuition, things related to the cost of care, so the max between those benefits can't be more than $150,000. Building a facility paying for tuition, things related to the cost of care, so the max between those benefits can't be more than $150,000. How many people, Doug, do you think that you talk to and help implement that are just like I?

Speaker 1: 4:38

had no idea that that exists, 98%. I mean we bring it up and they're like I had just no idea. I mean it's we, we, we bring it up and they're like, ah, I had just no idea. Um, so I mean it comes up and you know, it's one of those things that we, we bring up, especially as the fiscal year is winding to a close, to make sure that you know folks we work with are, you know, remember that this is available. Um, but yeah, it's I. I had no idea till till we started, uh, in this space, and even a little after we started in this space, and I think finding this was foundational to to start to do this right and look for more programs. It was like, if we don't know about the federal one, what do we not know about at the state level?

Speaker 2: 5:14

Yeah, yes, and I have those conversations day in and day out Talked with the large health system today in and around the chicago area and um the chicago kind of indiana. So I talked about the indiana credit like no, I, no idea.

Speaker 2: 5:33

and then the federal credit no idea and these are funds that are out there, like that's why we did, that's why we did this, but this one. So so what we had just talked about was what exists today. So if you aren't an employer in the US, you can get up to $150,000 as a tax credit. 10% or 25% of your spend goes back into your pocket as a tax credit. The Child Care for American Families Act HR 8540, bipartisan and the goal is to enhance that tax credit and make it more accessible for businesses. I mean, this is right up our alley. That's why we're having this emergency State of the Union call of Congress here, because this can be big. So I usually like to take the limelight, but I'm going to let you, doug, tell us about the Child Care for American Families Act. What could it do?

Speaker 1: 6:37

As a preface. This was introduced on May 23rd. It is very early in its journey through the House, but strong start, bipartisan support supported by two Democrats, republicans in the house, uh, across multiple states. Um and uh has already been referred to the house committee on ways and means. So it's, it's getting looked at, um, but this would be the most significant enhance of it, much more significant enhancement than I could have even imagined. Um, we'll see what comes out once it goes through the ringer of our political system, but hopefully it does come through the other side and let's get into a little bit of the detail zone.

Speaker 1: 7:21

So we talked about what the current programs are. Now what is currently in the proposed bill would be increasing the general percentage for qualified child care expenditures to 40%, so that 10 and 25 looks like maybe going away and just 40% to expenditures on child care. So we'll have to delineate that, see if there's still a divide in there. If that comes back in, for small businesses with 500 or fewer employees it actually is 50 of expenditures. So one of the big things we run into, especially down market with smaller employers, is like the cost benefit at scale may not always be there, so reducing that could be like very, very significant, um, but then also I was gonna say on the small business one.

Speaker 2: 8:13

Um, I think the challenge that I've had in talking with companies is when you have an employer that has 50 employees, what that means is really only maybe 20 have kids, and usually at that level you most employers are wanting to help support everybody, um, and so what you typically find is there's just not enough demand for it and versus like the cost of doing something and it's only supporting a slice of a slice. That's not. We don't like to hear that, but that has been the challenge for employers under 500. When we had started what we were doing, I thought all these small businesses would love it. I mean, they would be impacted even more, but turns out that it's a big expense.

Speaker 1: 9:11

Yeah, the economics of it is difficult and you know the numbers right. This could significantly, like really significantly, move that yeah I mean you're talking about, because they're not going to hit the cap, even the current cap. Much less we'll talk about what the cap may be going to. Yeah, but 50 you mean you're you're legitimately reducing the cost of a child care benefits program by 50 for all these businesses. That would be phenomenal, um, and and really support a lot of these smaller areas, federal it's, not to mention their state programs still that we talk about. That could be on top of that, um, but we'll keep going. Another another one of our favorite areas rural and low-income areas. Cap set in the current bill text at 60% of expenditures, and so everything designed to incentivize employers to offer more child care services, and so super exciting there. But wait, there's more. It also would increase the cap on an annual basis, and so today and I imagine this is probably going to get whittled down a little bit, but I still get to be excited about it for the moment right is um, the aggregate qualified expenses are capped at two million per year, so the expenses that can go towards the credit, but the total credit is then capped at $2 million per year, so the expenses that can go towards the credit, but the total credit is then capped at $1.2 million a year. So that would be a little less than 10x with the current cap of $150,000.

Speaker 1: 10:44

But we talk about expanding supply, about actually subsidizing care in a meaningful way, right, in the last episode we talked about, right like 250 a month maybe being kind of that sweet spot that we're finding you. Multiply that across thousands of employees, that's a very significant expenditure and 150 000 isn't going to make as big of a dent in it. That may, you know, galvanize action in that space. 1.2 million would, um, like it really would, um you know, even at that 40 percent level, like that is that is incredible, um, if it makes it through, um.

Speaker 1: 11:24

Some other things here that I think are are really interesting and I love to see is that businesses can claim the credit if they pool resources for child care facilities, so groups of small businesses can come together, right, I mean, we've had conversations over last year talking to, like a business district here in Kansas and they were like we want to try to pull employers together, you know, open up the space and take away some of that friction from getting people to subsidize care. I think everybody wants to provide some help but that cost is daunting, right. When we start running those calculations for how much a reimbursement or a subsidization program is going to cost, that can be an eye-popping moment, especially when it gets to cfo's desk.

Speaker 2: 12:15

Uh, to potentially reduce that by 40, 50, even 60 percent, uh, would be amazing I can already think of companies that we have talked to that are in these rural and low-income areas, um, where they have a huge frontline population. So this is certainly something I'm going to send him. Sure, he's already aware of it, but, um, yeah. So imagine, like I'm already thinking about, what the slide has to look like to convince someone. Here's going to be your cost before, here's your cost after, when you can stack on, stack federal state pen and care accounts, you name it, it can get. I mean, I've already run some numbers on using the existing services. I've done a couple scenarios and you can get it down to a couple bucks an hour, and a couple bucks an hour for someone making 16, 17, $18 an hour is way more affordable than eight to $10 an hour, than eight to $10 an hour. This is exactly what we wanted to see, and this is again one of many that are happening all across the state, all across the U S federal.

Speaker 2: 13:36

There's a ton of different programs. Then, um, this one came out.

Speaker 1: 13:42

Uh, that we talked last week or the week before about alabama and ohio and sylvania, yeah, I mean, it's happening everywhere, and so I mean this is like we're going to track this one, as well as all those others, very closely, um, and as they come closer to to fruition, um, and the ability to utilize them. Like it's, the information will be here, we'll be on top of it well, in addition to all those other states.

Speaker 2: 14:14

A quick throw in here is something that's happening in colorado. I wrote an article on this. It was my least liked article. Um, shout out to the one lady that I work with who liked it. Um, you know this. These are. It's a. It was a very niche article. It basically was like colorado's coming out with. I'll throw an acronym out here cd, ctc, which is the child and dependent care tax credit. This is at the employee level. So this is on an employee tax, state tax return, and there's a credit. Most if you use TurboTax, you're taking advantage of it. Federal has one and also states have one. Not every, not every state has one, not every state, not every state has one, and California has like even two. It's like the YCTC Young Child, like they have one that's a little bit different.

Speaker 2: 15:13

So today the CDCTC in Colorado is at 50% 70% of the corresponding federal credit. I'm not going to go into like all the details, but just know it's being raised. So again, when we look at, um, what was what's that one show? The about all the coupons, coupon hunters, or I feel like this is kind of like that. What's that one show? This is kind of like that. What's that one show? I don't know. Okay, if you know, if someone knows, it's called uh, it's something to do with couponing, but it is awesome because these are people that, like you know, strategize coupons dates and they extreme couponing and they get like negative, it's like negative. Uh, anyways, this is, you know, similar here. Um, it's again on your state tax credit.

Speaker 2: 16:17

But I did a scenario and I basically said let's imagine sarah, a single mom living in denver, colorado. She has a two-year-old daughter, her name is Lily and she pays $8,000 annually for daycare, which is still cheap. She only earns $55,000 a year and in 2023, colorado offered a 50% credit on the federal tax, on the federal credit for child care expenses. So how this breaks down, essentially, sarah would get. I said assume the federal credit for child care expenses was 20%, sarah would get a federal tax credit of 20%. 20% of 8,600. Okay, federal Colorado offers 50% of that credit, so it's 50% of 1,600,. Okay, federal Colorado offers 50% of that credit, so it's 50% of $1,600, that's $800. So, total tax benefit combining federal and Colorado credit Sarah reduces her tax liability by $2,400.

Speaker 2: 17:23

Now, after the new Colorado tax credit, which increases it, let's do the same example. Assuming Sarah gets the federal credit 1600, now the new credit is 70%, $1,120, which puts the total benefit to $2,720. That means $320 went back in her pocket. That is just another way that these programs are going to be able to stack. That comes out to an extra $25 a month, but still $300 something a year. It is all about reducing it. And so this is again Colorado. This is at the employee level, so it's a little bit tangent of our employer focus. But I wanted to bring this up because, again, these are things that are happening that states are doing, federal governments are doing. We're seeing it and it's happening, and this is one example.

Speaker 1: 18:33

And again, is that going to change the landscape completely? No, but that's $25 a month right to help reduce that threshold. And when we see these larger programs go into place, it increases the impact of an employer program, it increases the impact of an employer tax credit, and so everything helps at the end of the day. Yeah.

Speaker 2: 18:52

And imagine a tool or company out there that automates all of this, where at the end of the year it can send data on. Here's how much you gave as a stipend in rural areas to certain employees.

Speaker 2: 19:07

And here's where it was in metro areas in these different states. And, by the way, because you have employees in that state, you also qualify for this. And, by the way, here's a report to your employee to remind them to file for this. Like, wouldn't that be a cool thing to work on, really cool thing to work on, really cool thing to work on.

Speaker 2: 19:28

And that's what we do. If you have questions about child care benefits, doug and I would be more than happy to talk to you. We're going to cue the music under 20 minutes and have a great Tuesday Speed round, speed round, speed round.