Tax Connections Newsletter – Spring 2022
Robert Swenson

Employer-Provided Child Care Credit Helps Businesses Help Their Workers

The COVID-19 pandemic has led to a significant increase in the number of employees working from home. Given the convenience of remote work, especially for parents of young children, employers of in-person workers are under increasing pressure to provide child care.

Fortunately, the tax code provides an incentive in the form of the Section 45F employer-provided child care credit. Here is how it works.

The basics

The Section 45F credit is part of the general business credit, which is composed of more than 30 separate tax credits that are subject to combined limits based on your tax liability. To calculate and claim the credit, a business files Form 8882, Credit for Employer-Provided Child Care Facilities and Services.

The credit is equal to 25% of an employer’s qualified child care facility expenditures plus 10% of its qualified child care resource and referral expenditures paid or incurred during the tax year. It is limited to a total of $150,000 per tax year.

Facility expenditures

Qualified child care facility expenditures are amounts paid:

  • To acquire, construct, rehabilitate or expand property that is: 1) To be used as part of a qualified child care facility of the taxpayer; 2) Depreciable or amortizable; and 3) Not part of the principal residence of the taxpayer or one of the taxpayer’s employees;
  • To operate a qualified child care facility of the taxpayer, including expenses for training, scholarship programs and increased compensation for employees with child care training; or
  • Under a contract with a qualified child care facility to provide child care services to taxpayer’s employees.

To qualify, expenses must not exceed the fair market value of the child care provided. A qualified child care facility is one that meets all state and local regulatory requirements and:

  • Is used principally to provide child care (unless it is also the personal residence of the person who operates it);
  • Is open to all of the taxpayer’s employees during the tax year; and
  • Does not discriminate in favor of highly compensated employees.

In addition, if the facility is the taxpayer’s principal trade or business, at least 30% of enrollees must be dependents of the taxpayer’s employees.

Special rules and restrictions

Qualified expenditures are amounts paid under a contract to provide resource and referral services to help a taxpayer’s employees find child care. To avoid double benefits from the same expenditures, the taxpayer must reduce its basis in any qualified child care facility by the amount of the credit attributable to facility-related expenditures. The taxpayer must also reduce other deductions or credits that are based on the same expenses.

Taxpayers may have to recapture (pay back) some or all of the credit if a qualified child care facility ceases to operate as such, or undergoes a change in ownership, before the tenth tax year after the tax year in which it is placed in service. The percentage of the credit that must be recaptured decreases gradually over the ten-year period.

Valuable recruiting tool

As employers compete for a shrinking labor pool and remote work becomes more common, employer-provided child care can be an attractive perk for current and prospective employees. The Section 45F tax credit can help reduce the cost of these benefits.

Got Crypto? Beware of Tax Surprises When Dealing With Cryptocurrencies

In recent years, interest in cryptocurrencies — such as Bitcoin and Ethereum — has exploded. Once viewed as a novelty, these currencies are increasingly entering the mainstream as an investment or an alternative currency. If you have jumped on the cryptocurrency bandwagon, it is important to understand the tax implications.

Owners are often surprised to discover that when they use cryptocurrency to purchase goods or services, they may trigger capital gains or losses they must report on their tax returns. Even investors who buy and hold cryptocurrencies may have to report taxable income when certain events take place on the blockchain or other digital ledger system on which cryptocurrency transactions are recorded.

Related Read: Confused About Crypto? Welcome to the Wild West of Tax Considerations for Investing in or Doing Business With Cryptocurrency

Currency versus property

The IRS treats cryptocurrency (also called virtual currency) as property. That means when you sell cryptocurrency in exchange for traditional currency, you must recognize a capital gain or loss. The amount of that gain or loss, as with other types of property, is the difference between the sale price and your adjusted basis in the cryptocurrency. Generally, your basis is the amount you spent (in U.S. dollars) to acquire the virtual currency, including fees, commissions and other acquisition costs.

Your gain or loss may be short-term or long-term, depending on whether you have held the cryptocurrency for more than one year. Keep in mind that if you sell cryptocurrency at a loss, you are subject to the same deduction limits as other capital losses.

Purchases of goods or services

Perhaps the biggest tax surprise involving cryptocurrency is that using it to purchase goods or services can trigger a capital gain or loss. That is because, unlike a purchase using traditional currency, a cryptocurrency transaction is treated as an exchange of one property for another. Your gain or loss is the difference between the fair market value (FMV) of the goods or services you acquire and your adjusted basis in the cryptocurrency you use to make the purchase.

For example, suppose that you own ten Bitcoin that you purchased in 2018 for $5,000 each, for a total of $50,000. In 2021, on a date when the FMV of one Bitcoin had skyrocketed to $50,000, you used four Bitcoin to buy a Tesla Roadster with an FMV of $200,000. Assuming your adjusted basis in the Bitcoin is $5,000 each, your purchase generates $180,000 in long-term capital gain ($200,000 – $20,000).

From the perspective of the seller or service provider, payments made in cryptocurrency must be reported as income, based on the FMV of the cryptocurrency when the payments are received.

Related Read: Investing in Cryptocurrency: How To Avoid Unpleasant Tax Surprises

Payments to employees or contractors

Just like traditional currency, cryptocurrency may be used to pay employees’ wages or to pay independent contractors for their services. The company must track the cryptocurrency’s FMV as it is paid and then report the cumulative FMV for the tax year on Forms W-2 or 1099.

Likewise, the recipient must report the cryptocurrency payment as income, based on its FMV when it is paid. The usual rules apply regarding income tax withholding, payroll taxes and self-employment taxes.

A company may also have a taxable gain or loss due to appreciation or decline in the FMV of the cryptocurrency during the time it was held before it was paid to the employee or independent contractor. Assuming the company isn not in the trade or business of buying and selling virtual currencies, the gain and loss will be a capital gain or capital loss (short-term or long-term depending on how long it was held).

Digital ledger events

Even if you do not conduct any transactions using cryptocurrency, certain events on the blockchain or other digital ledger may generate taxable gain. IRS guidance describes two such events:

  1. A “hard fork,” which essentially means that a single cryptocurrency is split into two; and
  2. An “airdrop,” which may or may not follow a hard fork, is “a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses” — in other words, the developer of the new cryptocurrency drops “free coins” into owners’ digital wallets.

According to IRS guidance, a hard fork by itself does not trigger taxable income. But if the new cryptocurrency is airdropped or otherwise transferred to owners’ accounts, and owners have the ability to immediately dispose of the new cryptocurrency, then they must recognize it as ordinary income.

Documentation is critical

Because the value of cryptocurrency fluctuates widely and frequently, it is critical to maintain records that show the dates and prices of all your cryptocurrency purchases and sales. You should also keep thorough records of any transactions involving cryptocurrency, such as purchases or sales of goods or services, including the cryptocurrency’s FMV on the dates that payments are received.

If you purchase cryptocurrency on different dates for different prices, it may be possible to specifically identify the units you are selling or otherwise disposing of. This provides an opportunity to minimize capital gains by selecting the units with the highest adjusted basis. If you do not (or cannot) specifically identify the units, then you must use the first-in, first-out method — in other words, you are presumed to dispose of the oldest units, which may increase your tax liability.

Sidebar: Reporting cryptocurrency on your tax return

If you have bought, sold or used cryptocurrency, it is important to understand your reporting obligations for federal tax purposes. Beginning with the 2020 tax year, Form 1040 includes the following question, directly below the taxpayer’s general information section: At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?

According to IRS guidance, if you purchased cryptocurrency with “real” currency in 2020, and had no other cryptocurrency transactions during the year, you may answer “no.” However, if you sold cryptocurrency or used it to purchase goods or services during the year, you must answer “yes” and report these transactions on Schedule D, Capital Gains and Losses. And, of course, you must report any W-2 wages or 1099 income received in cryptocurrency.

For more information, contact Rob Swenson at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Tax Services.

Forward Thinking