Hello everyone,

I am a solo practioner and have incorporated my practice. I pay 35K per year to a nanny to take care of my three children (ages 2, 2, and 3). I have been reading the tax code (in all of my free time) concerning employer sponsored child and dependent care. If I had the corporation pay my nanny's salary, would I then be able to take this credit. My understanding is that the credit allows for 25% of expenses up to 150K. As you can see, this would be a substantial credit for me (credit not deduction). I have three employees and I believe that if I am allowed to do this, then this benefit is open to them as well. This brings me to a final question. My wife is a pediatrician and has a corporation with no employees. Could I allow her corporation to pay for the nanny instead? Thank you in advance for your responses.

Zip Code: 78132

That's an interesting question. Keep posting follow up questions until we figure this rule out.

Here are the rules to claim this tax credit:

Amount of Credit:

The credit equals the sum of two components. The first component is 25% of “qualified child care expenditures.” The second component is 10% of “qualified child care resource and referral expenditures.”

Qualified Child Care Expenditures
There are three types of qualified child care expenditures. The first type is any amount paid or incurred to acquire, construct, rehabilitate, or expand property that meets the following requirements:
• The property is to be used as part of a “qualified child care facility,”
• A depreciation or amortization deduction is allowable with respect to the property, and
• The property is not part of the principal residence of the taxpayer or any employee of the taxpayer.

The second type is any amount paid or incurred for the operating costs of the taxpayer's qualified child care facility, including costs related to employee training, scholarship programs, and providing increased compensation to employers with higher levels of child care training.

The third type is any amount paid or incurred under a contract with a qualified child care facility to provide child care services to the taxpayer's employees. However, amounts that otherwise are qualified child care expenditures are not so treated to the extent of expenses exceeding the fair market value of the child care.

A qualified child care facility is a facility that meets the following requirements:
• It is principally used to provide child care assistance,
• It meets the requirements of all applicable laws and regulations of the state or local government in which it is located, including those related to licensing of the facility as a child care facility,
• It is not the principal residence of its operator,
• It is open to enrollment by the taxpayer's employees during the taxable year,
• If it is the taxpayer's principal trade or business, at least 30% of its enrollees must be dependents of the taxpayer's employees, 1138 and
• Its use, or the eligibility for its use, does not discriminate in favor of the taxpayer's highly compensated employees.

Qualified Child Care Resource and Referral Expenditures

Qualified child care resource and referral expenditures are amounts paid or incurred under a contract to provide child care resource and referral services to an employee of the taxpayer. However, the expenditures are not qualified unless the providing of the services, or the eligibility to use the services, do not discriminate in favor of the taxpayer's highly compensated employees.

Zip Code: 01801

Thank you so much for your reply. You have pulled the same section of the tax code as I did. I did notice the stipulation about offering the benefit to all of my employees (similar to retirement, healthcare, etc). This is why it may be advantageous for me to use my wife's corporation, which has no employees except for my wife. Please let me know what you find. If I am right about this credit, it should help many of your other clients (which is what it is all about). Also, please email me your contact information because I have another matter that I would like to talk with you about in private. Thank you again..

Zip Code: 78132

I'm not sure that you'll be eligible for this tax break. Unless I'm not reading the rules correctly, your business only qualifies for a credit if:

1. You pay to build a dependent care facility on your premises

2. You incur expenses in connection with operating your day care facility

3. You enter into a contract with a qualified child care facility to provide care on behalf of your staff.


So I guess my first question to you would be if you would even qualify for this tax credit.

Zip Code: 01801

Maybe i am reading it incorrectly. My understanding is that money paid to an "entity" who is providing childcare for an employee is deductible under this credit. I know of several employers that put money for their employee's childcare expenses into a flex account. I do not believe that they would be doing it if they didnt get a tax break. Again my wife's corporation has no other employees and would be perfect for paying the nanny. I have also posed this question to my tax attorney and accountant (have not heard back from them yet). If two of the three of you feel that this credit is fruitless, I will give it up and use my time for something more constructive. Thank you very much for your time.

Zip Code: 78132

Please let us know what they tell you.

Zip Code: 01801