Employer Childcare Credit
Employers that provide childcare for their employees can claim a federal tax credit for part of the cost. Starting in 2026, the credit is 40% of qualified costs up to a $500,000 annual credit, or 50% up to $600,000 for eligible small businesses. A credit reduces tax dollar for dollar, so a small business spending $300,000 could see up to $150,000 come off its tax bill.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Employers with a workforce of working parents where childcare affects hiring and retention
- Businesses building, expanding, or operating an on-site or near-site childcare facility
- Employers willing to contract with a licensed childcare provider for reserved slots
- Small businesses that can pool resources with other employers through a shared facility or intermediary
Who it's not for
- Employers who only want to reimburse employees for childcare; that is a dependent care assistance program, a separate benefit
- Businesses without enough tax liability to use a credit and no realistic path to use carryforwards
- Employers who cannot commit to running the program for the 10-year recapture period
How it works
The credit covers qualified childcare expenditures: the cost to acquire, build, rehabilitate, or expand property used as a qualified childcare facility, the cost of operating it, and payments to a licensed provider to care for employees' children. A smaller percentage applies to resource and referral services that help employees find care.
The 2025 law raised the credit beginning in 2026 from 25% to 40% of qualified costs, and the annual cap from $150,000 to $500,000. An eligible small business, one that meets a gross-receipts test, gets 50% with a $600,000 cap. The caps are indexed for inflation after 2026. The law also lets small businesses share a facility and use third-party intermediaries.
The facility must meet state licensing rules and be open to employees on a basis that does not favor highly compensated employees. If childcare is the employer's main business, at least 30% of enrolled children must be dependents of employees.
The credit is part of the general business credit. Unused amounts generally carry back one year and forward 20 years. You cannot take both the credit and a full deduction for the same dollars. Depreciable basis is reduced by the credit amount, and the deduction for operating costs is reduced to match.
If the facility stops operating as a qualified childcare facility or is sold within 10 years, part of the credit is recaptured on a sliding schedule.
Illustrative example
Illustrative: an eligible small manufacturer contracts with a licensed childcare center to reserve slots for employees' children and pays $300,000 for the year.
- Qualified childcare expenditures: $300,000
- Credit rate for an eligible small business: 50%
- Credit: $300,000 x 50% = $150,000 (below the $600,000 cap)
- Under the pre-2026 rules: $300,000 x 25% = $75,000
- Increase from the 2025 law: $150,000 - $75,000 = $75,000
- Net cost of the program after the credit: $300,000 - $150,000 = $150,000, with the deduction for the payments reduced by the $150,000 credit
In this illustration, the credit pays for half of the $300,000 program, a $150,000 reduction in federal tax.
The rules
| Rule | Citation |
|---|---|
| A credit is allowed for qualified childcare expenditures and resource and referral expenditures, with increased rates and caps beginning in 2026. | IRC §45F |
| Part of the credit is recaptured if the facility stops operating as a qualified childcare facility within 10 years. | IRC §45F(d) |
| Basis and deductions are reduced by the amount of the credit; no double benefit. | IRC §45F(f) |
| The credit is a component of the general business credit, subject to its limits and carryover rules. | IRC §38 and §39 |
Watch-outs
- The provider must be licensed under state law. Unlicensed arrangements do not qualify.
- Programs that favor owners or highly compensated staff can disqualify the facility.
- Recapture can apply years later if the facility closes, changes use, or is sold. Factor that into lease and real estate decisions.
- Keep enrollment, contract, and cost records by year. The credit is claimed on Form 8882 and audited from the underlying invoices.
What we do
We test whether your business meets the small-business definition, model the credit against your tax liability and carryforwards, and compute the basis and deduction reductions. We file Form 8882 and keep the recapture schedule on file for the 10-year period.
Questions
Do we have to build a childcare center?
No. Payments to a licensed childcare provider to care for your employees' children can qualify.
Is this the same as a dependent care FSA?
No. A dependent care FSA lets employees pay for care with pre-tax dollars, up to $7,500 starting in 2026. This credit reduces the employer's tax for providing care. They can work together.
What if we cannot use the full credit this year?
Unused general business credits can generally carry back one year and forward 20 years.