Can a Texas day-care provider claim the franchise-tax child-care credit for the care it provides to the children of its own employees?

Plain-English summary

A day-care business subject to the (pre-2008) Texas franchise tax asked whether it could claim the state's child-care credit for the care it provides to the children of its own employees. The Comptroller answered that it can, under a newly adopted policy.

• The credit. Chapter 171, Subchapter N of the Tax Code gives a franchise-tax credit for establishing a day-care center or purchasing child-care services. Historically the credit was aimed at employers who buy child care or build a center for their workers.
• The new policy. The Comptroller adopted a policy that lets a child-care provider subject to franchise tax take the credit for its own provision of child care to the children of its day-care employees — in other words, the provider's in-house care of its staff's children can qualify.
• How it is calculated. The letter gives a two-step formula:
  • Percentage of expenses = eligible expenses that would qualify under Tax Code Sec. 171.703(b)(1)-(7) divided by [gross receipts from day-care services + foregone fees for employees' children].
  • Child-care credit = [that percentage x the full tuition and fees for the employees' children] minus any tuition actually received for caring for those children.
• Limits. Eligible expenses do not include compensation paid to officers, directors, or owners, and the whole credit is subject to the limitations in Tax Code Sec. 171.703(c).

A note on the subject line. The STAR index labels this letter "Child Care Credit Not Allowed," but the letter's own text announces the opposite — a new policy that does allow the credit for a provider's own employees' children. This page follows the operative text of the letter, not the index label.

Currency note. This is the pre-2008 franchise tax. The 2007 legislation (House Bills 3 and 3928) replaced it with the current margin tax, which does not carry forward the Subchapter N child-care credit. Treat this as historical/audit-year guidance and confirm any current incentive separately.

What this means for you

Day-care and child-care businesses

If you ran a day-care operation subject to the old franchise tax and provided care to your own employees' children (often at a reduced or waived rate), this policy let you fold the value of that in-house care into the child-care credit using the formula above — rather than being limited to credits for purchasing outside care.

Accountants and tax professionals

The mechanics matter: the numerator is only expenses that would qualify under Sec. 171.703(b)(1)-(7), the denominator adds back the fees foregone for employees' children, and you subtract tuition actually collected for those children. Owner/officer/director compensation is excluded, and the Sec. 171.703(c) cap still applies. Because the credit does not exist under the margin tax, this is relevant only to open pre-2008 franchise-tax years.

Common questions

Q: Can a day-care provider claim the credit for caring for its own employees' children?
A: Yes. Under this policy, a provider subject to franchise tax could claim the Subchapter N child-care credit for the in-house care it provides to the children of its day-care employees.

Q: How is the credit amount determined?
A: By formula: a percentage of eligible expenses (those qualifying under Sec. 171.703(b)(1)-(7), divided by gross day-care receipts plus foregone employee-children fees) is multiplied by the full tuition and fees for the employees' children, then reduced by any tuition actually received for their care.

Q: What expenses are excluded?
A: Compensation paid to officers, directors, or owners is not eligible, and the credit is subject to the limitations in Tax Code Sec. 171.703(c).

Q: Does this credit still exist?
A: No. It belonged to the pre-2008 franchise tax and is not part of the current margin tax. Treat it as historical.

Citations and references

Statutes:

• Tex. Tax Code Ch. 171, Subchapter N (franchise-tax child-care credit)
• Tex. Tax Code Sec. 171.703(b)(1)-(7) (eligible child-care expenses)
• Tex. Tax Code Sec. 171.703(c) (limitations on the credit)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200510298L

Original ruling text

Franchise Tax: Child Care Credit

Day Care Providers Eligible for Child Care Credit for Employees’ Children

Chapter 171, Subchapter N provides for a tax credit for establishing a day-care
center or purchasing child-care services. The Comptroller has adopted a new
policy that allows child care providers subject to franchise tax to receive
this tax credit for its own provision of child care services for the children
of day care employees.

The franchise tax credit for these child care providers will be calculated as
follows:

% of Expenses = Eligible expenses that would qualify under Tax Code Sec.
171.703(b)(1-7) / [Gross receipts from day care services + Foregone fees for
Employees’ children]

Child Care Credit = [% of Expenses X Full Tuition and Fees for Employees’
Children] minus Tuition Received for Care of Employees’ Children

Eligible expenses do not include compensation paid to officers, directors, or
owners. The credit calculated above is subject to the limitations provided in
Tax Code Sec. 171.703(c).

For any questions or additional information, please email
[email protected].