A robust benefits package is one of the best tools for attracting and retaining top talent. For employees with children, employer-provided child care is one of the most valued perks — but for many small businesses, the cost has historically been out of reach.
That may be about to change. Thanks to significant tax law enhancements taking effect in 2026, the federal credit under IRC Section 45F is now far more generous, making it worth a fresh look whether you want to open a child care facility, contract with a provider, or join a multi-employer arrangement.
WHAT CHANGED IN 2026
Under Section 45F, employers can claim a tax credit for eligible expenses paid to provide child care to employees. Starting in 2026, the credit has been dramatically expanded:
- The base credit rate jumped from 25% to 40% of qualified child care facility expenditures.
- The annual cap rose from $150,000 to $500,000 per tax year.
- Beginning in 2027, the $500,000 limit will be adjusted annually for inflation.
The 10% credit for qualified child care resource and referral expenditures remains in place.
Enhanced Benefits for Small Businesses
Eligible small businesses receive an even sweeter deal. If you qualify, you can claim a credit equal to 50% of qualified child care facility expenses, plus 10% of resource and referral costs, capped at $600,000 for 2026 (also inflation-adjusted going forward).
To qualify as a small business, your average annual gross receipts over the preceding five tax years must fall below an inflation-adjusted threshold. For 2026, that threshold is $32 million.
More Flexibility in How You Provide Care
The updated rules also make the credit more accessible. Eligible small businesses can now pool resources with other employers to provide child care, and they can use third-party intermediaries to facilitate services. That means you no longer need to operate your own facility to take advantage of the credit.
WHAT COUNTS AS A QUALIFIED EXPENDITURE
Qualified child care facility expenditures include amounts paid or incurred to:
- Acquire, construct, rehabilitate, or expand property that will be used as part of your qualified child care facility. The property must be depreciable or amortizable and cannot be part of your principal residence or an employee’s home.
- Operate your qualified child care facility, including costs to train and compensate employees and provide scholarship programs.
- Contract with a qualified child care facility to provide eligible services to your employees — or contract with an intermediary that arranges care with licensed providers.
One important caveat: qualified expenses cannot exceed the fair market value of the care provided.
What Makes a Facility “Qualified”?
A qualified child care facility must meet all state and local licensing and regulatory requirements. In addition, it must:
- Be used principally for child care (unless it is also the personal residence of the operator),
- Be open to all employees during the tax year, and
- Not discriminate in favor of highly compensated employees.
If operating a child care facility is your principal trade or business, at least 30% of enrollees must be dependents of your employees.
ADDITIONAL RULES TO KEEP IN MIND
No Double Tax Benefit
To prevent double-dipping, your tax basis in any qualified child care facility must be reduced by the amount of the credit attributable to facility-related expenditures. You also cannot claim other deductions or credits based on the same expenses.
Recapture if You Sell or Close the Facility
If your child care facility stops operating as such — or changes ownership — before the tenth tax year after it was placed in service, you may have to recapture (repay) some or all of the credit. The percentage you must recapture decreases gradually over that 10-year period.
General Business Credit Limitations
The Section 45F credit is part of the general business credit, which combines more than 30 separate credits subject to limits based on your tax liability. That means the amount you can use in the current year may be capped. Fortunately, any unused credit can generally be carried back one year and carried forward 20 years.
Claim the credit on Form 8882, “Credit for Employer-Provided Childcare Facilities and Services.”
IS THIS BENEFIT RIGHT FOR YOUR BUSINESS?
Offering child care is a meaningful long-term investment in your workforce — but it is not the right move for every employer. Before moving forward, weigh the pros and cons carefully:
- What are your workforce demographics? Do enough employees have young children to justify the investment?
- What are the operational costs and ongoing management responsibilities?
- Are there qualified local providers you can contract with instead of building your own facility?
- What are the risks and liabilities involved, even when outsourcing?
If you decide to contract with a third party, due diligence is essential. Vet the provider’s reputation, monitor service quality, and be prepared to make changes as needed.
NEXT STEPS: LET’S CRUNCH THE NUMBERS
If you are interested in exploring employer-provided child care, we can help you evaluate the opportunity from every angle — including modeling the credit’s potential value for your specific situation. Contact us today to learn more and get started.
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