SF5177

Purpose

• Establish a new employer-provided child care credit against Minnesota taxes to encourage employers to offer or fund child care for employees. The credit is tied to the federal Child and Dependent Care Credit (IRC section 45F) and is calculated as a percentage of the federal credit, with Minnesota-specific limits based on expenses incurred or paid in Minnesota.

Main Provisions

• Definition and scope
  • Defines terms such as “Employer” (as used in Minnesota tax law) and “Internal Revenue Code” (IRC) as amended through July 1, 2025.
• Credit amount
  • Employers receive a credit against Taxes imposed under Minnesota Statutes chapter 290 equal to a percentage of the federal credit allowed under IRC section 45F, limited to qualified child care expenses or qualified child care resource and referral expenditures paid or incurred in Minnesota.
  • If a taxpayer’s federal 45F credit is partly based on expenses outside Minnesota, the Minnesota credit is a percentage of the federal credit attributable to Minnesota expenses.
• Allocation and administration
  • Employers must apply to the Commissioner of Employment and Economic Development (DEED) for a credit using a form prescribed in consultation with the Commissioner of Revenue.
  • DEED issues an allocation certificate stating eligibility, the credit amount, and the taxable year the credit is allocated.
  • Annual caps apply to total credits allocated; allocation certificates are issued on a first-come, first-served basis, and unallocated funds roll over to subsequent years until exhausted.
• Pass-through treatment
  • Credits awarded to partnerships, LLCs taxed as partnerships, or S corporations pass through to partners, members, or shareholders pro rata based on ownership shares or as otherwise allocated in the entity’s documents or agreements as of the end of the taxable year.
• Carryover and limitations
  • If the credit exceeds the taxpayer’s current tax liability, the excess may be carried forward for up to five subsequent taxable years.
  • Unused credits carry forward in order beginning with the earliest eligible year, and the amount carried forward cannot exceed the taxpayer’s remaining tax liability in those years.
• Interaction with federal rules
  • The Minnesota credit mechanics are tied to the federal 45F credit; only the portion attributable to Minnesota expenses is usable in Minnesota, reinforcing local support for employer-provided child care.

How this changes existing law

• Creates a new, state-level tax credit program that links to the federal Child and Dependent Care Credit (IRC 45F) and requires administration by DEED in coordination with the Department of Revenue.
• Establishes formal allocation process, annual caps, and pass-through treatment for entities, plus carryover provisions, which are not currently part of Minnesota tax law.

Significance and Potential Impact

• Aims to incentivize employers to invest in employee child care, potentially reducing child care costs for workers and supporting workforce participation.
• Requires employers to document Minnesota-specific child care expenses and qualify for the state credit through a structured approval and allocation process.

Relevant Terms

• employer-provided child care credit
• Minnesota taxes (Minnesota Statutes chapter 290)
• Internal Revenue Code (IRC)
• section 45F (federal Child and Dependent Care Credit)
• qualified child care expenses
• qualified child care resource and referral expenditures
• allocation certificate
• Department of Employment and Economic Development (DEED)
• Department of Revenue
• first-come, first-served allocation
• partnerships
• LLCs taxed as partnerships
• S corporations
• carryover
• tax liability
• taxable year

Relevant Terms employer-provided child care credit, Minnesota taxes, Minnesota Statutes chapter 290, Internal Revenue Code, section 45F, qualified child care expenses, qualified child care resource and referral expenditures, allocation certificate, Department of Employment and Economic Development, Department of Revenue, first-come, first-served, partnerships, LLCs taxed as partnerships, S corporations, carryover, tax liability, taxable year