What are the Tax Considerations of the American Rescue Plan Act (ARPA) Child Care Stabilization Grants for Home-based Child Care Providers?

Stabilization Grants
In response to the COVID-19 public health emergency and its impact on the child care industry, President Biden signed the American Rescue Plan Act of 2021 (ARP Act). The plan includes $24 billion in child care stabilization grant funding for states, territories, and tribes to distribute within their state using the Child Care and Development Grant (CCDBG) formula. The purpose of the child care stabilization grants is to support child care centers and home-based child care providers to stay open or reopen. These grants are in addition to other pandemic-related relief funds (e.g., CARES grants, Paycheck Protection Program loans, EIDL loans). Each state, territory, and tribe may further clarify eligibility requirements, but the federal eligibility parameters indicate that licensed, registered, and legally license-exempt center-based and home-based child care providers are eligible. While each state, territory, or tribe can specify the specific uses of grant funds, the funds are intended to support providers’ general operating expenses, wages and benefits to employees and owners, rent, utilities, cleaning and sanitation supplies and services, and other goods and services needed to maintain or resume operations as well as mental health supports for children, families, and employees. The grants cannot be used for new construction or major renovations.

The following examples are meant to illustrate the different ways in which a family child care provider might utilize the grant and the tax implications of each scenario. However, since every situation is unique and states may release additional requirements or restrictions, providers should always consult a tax professional to obtain advice specific to their own unique situation.

Tax Implications for Family Child Care

In almost every situation, a provider will benefit financially from these grants even after taxes. That said, if a provider is receiving other public benefits based on income eligibility (e.g., health benefits, tax credits, student financial aid) and this grant increases their taxable income to a level that will make them no longer eligible for those benefits, they may need to look very closely at the cost versus the benefit of receiving a stabilization grant.

In a recent webinar hosted by the Office of Child Care Technical Assistance Network, national family child care business expert Tom Copeland provided an overview of the stabilization grants and how family child care homes can handle the tax implications. The tax implications of the grants depend on several factors, namely, how the provider uses the funds, the provider’s household income, and possibly the state in which they live. Family child care providers must report any portion of the stabilization grant that they use to pay themselves as taxable income on their federal and state income tax return (unless their state chooses to make the grant not taxable).

Example 1: Provider pays herself the full amount

Provider A receives a $3,500[1] grant and uses the entire amount of the grant to pay herself; the full amount of the grant will be taxable, but the provider can spend the funds on whatever she wants (e.g., pay down personal debt, save for an emergency, save for retirement, go on vacation). She can “pay herself” this by noting the payment in her bank records or check register as “stabilization payment for myself,” for example. She may keep the funds in the bank account as an emergency fund for later use or she can spend it as she wishes.

For tax purposes, she should reserve a portion of the grant amount to go toward her taxes. A conservative estimate would be to assume 15 percent for social security/Medicare plus 15 percent federal income tax and about 10 percent for state and local income tax, for a total of 40 percent or $1,400. This still leaves $2,100 for the provider to spend as she chooses (or save it). Provider A’s household income is low enough; she may only owe the 15 percent in social security and Medicare expenses and can keep $2,975 for any use.

[1]This amount will depend on the state in which the provider lives

Example 2: Provider uses full amount for business expenses
Provider B receives a $3,500 grant and uses it to pay expenses for her business that she would not otherwise pay (e.g., extra employee wages, cleaning supplies, toys). She can deduct these expenses from the taxes she owes, so she will not owe additional taxes if she receives the grant. $3,500 income – $3,500 expenses = $0 taxable income and $0 taxes owed. The provider should keep two copies of all receipts from purchases made so that one can be kept for her IRS records and the other can be used if required for grant reporting.

Example 3: Provider uses some of the grant to pay herself and some for business expenses

Provider C receives a $3,500 grant and uses the money to pay for equipment that is used for both her business and her family (e.g., computer, television, furniture). The portion that she uses for businesses expenses can be deducted from her taxable income, but the other half cannot, and she will need to pay taxes on that amount. Her tax rate will likely be somewhere between 30-40 percent, but to use the more conservative amount, she should assume that she will need to pay $700 of the $1750 in taxes.

It is also important for providers to know that not all business expenses are fully tax deductible. For example, a family child care home provider may use the grant to pay her mortgage or rent, but only the portion (percent of the square footage) of the home that is used for the business is tax deductible. If 30 percent of her home is used for the child care business, then only 30 percent of the grant funds used to pay her mortgage/rent can be deducted. In this case, she can deduct the business portion of these expenses by estimating the percent of time they will be used for business versus personal purposes (usually her time-space percentage).

Where to find more information
Help is on the way! Supporting Family Child Care to Prepare for Child Care Stabilization Grants
Help is on the way! Supporting Centers in Preparing for Child Care Stabilization Grants
Tom Copeland’s Blog: Taking Care of Business
Find Stabilization Grant Applications for your State or Territory