Employer-Provided Child Care Tax Credit

As we discussed in last week's blog, it is vitally important that employers find ways to retain their top talent.  A major reason that people leave the work force is that child care is so expensive that many parents end up feeling that they would just be working to pay for child care.  However, the Internal Revenue Code provides a great solution!  Employers that provide child care may claim the Employer-Provided Child Care Tax Credit and retain their talented employers!

An employer who provides child care may claim a federal income tax credit equal to 25% of qualified child care expenditures and 10% of qualified child care resource and referral expenditures, with a maximum tax credit of $150,000.

Qualified child care expenditures include:

• Costs to acquire, construct, rehabilitate, or expand the property that is to be used as a qualified child care facility, as long as it is not part of the principal residence of the employer or any of the employer's employees;
• The operating costs of the qualified child care facility; and
• Contracts with a qualified child care facility to provide child care services to employees

Example

XYZ Corporation has been experiencing a high turnover rate because of the number of young parents that it employers.  In an effort to retain a greater number of its highly talented employees, it decided to convert some unused office space into a child care facility (at a cost of $300,000) and hire several individuals with extensive amounts of child care training to operate the facility (at a cost of $200,000 per year).

XYZ Corporation can claim a federal income tax credit of $125,000 (25% of the qualified expenses) in the first year, and a $50,000 tax credit (25% of the operational costs) in the following years.

If you would like to learn more about the Employer-Provided Child Care Tax Credit and special rules that apply to it, please feel free to send me an e-mail.

As always, I appreciate your feedback.  Please leave your thoughts in the comment section below.

Employee Stock Options

As an employer, it is important to retain your top talent in a cost-effective way.  Stock options are one tool in your arsenal to be able to keep your employees happy.  In today's blog, we will discuss both what statutory and non-qualified stock options are, and the tax consequences that your employees will face upon their receipt.

A stock option gives employees the right to purchase a certain number of shares of the employer's stock at an established price. In general, the employer's goal in granting the stock options is to both incentivize the employee to remain with the company and work hard to increase the value of the company's stock.

There are 2 general types of stock options: 1) Statutory Stock Options and 2) Non-Qualified Stock Options.

Statutory Stock Option

A statutory stock option receives preferential treatment under our tax system.  Income is not recognized when the stock option is granted or even when it is exercised.  It is only recognized when the the stock is eventually sold.  Furthermore, unlike other type of compensation, the amount realized from the sale is generally treated as a capital gain or loss.

To qualify as a statutory stock option, the following requirements must be met:

• The individual granted the options must be employed by the company granting the option, or a related company, from the time the option is granted until the 3 months before the option is exercised.  However, in the case of incentive stock options (a specific type of statutory stock option), the individual granted the options must be employed by the company granting the option, or a related company, from the time the option is granted until a year before the option is exercised;
• The stock must be held for at least 2 years from the grant date and for at least 1 year from the exercise date; and
• The option may not be transferable except at death.

If the holding period requirement is not met, a portion of the gain will be treated as ordinary income.

Non-Qualified Stock Options

A non-qualified stock option is simply a stock option that is non-statutory.  Unlike a statutory stock option, it will be treated as compensation and taxed at ordinary income rates.  When it is subject to tax depends upon whether the stock's fair market value can be readily determined.  If it can, then the option is taxed to the employee as compensation at the time it is granted.  If it cannot, the employee will recognize compensation when the option is exercised.  The amount included in compensation is the difference between the amount paid for the stock and the fair market value at the time it becomes substantially vested.

If you are considering offering your employees stock options, or if you are an employee receiving stock options, and you have questions about the tax consequences, please do not hesitate to send me an e-mail.

As always, I appreciation your feedback.  Please leave your thoughts in the comment section below.