Section 45F: The Employer-Provided Child Care Tax Credit

Why does this matter right now?

Because the credit got a lot more generous starting in 2026. The maximum annual credit jumped from $150,000 to $500,000 (or $600,000 for eligible small businesses), and the percentage of expenses that count toward the credit increased as well. Lawmakers designed these changes specifically to make the benefit financially realistic for more employers, including smaller ones that couldn’t justify the cost before.

What can employers actually get the credit for?

Qualifying expenses generally include:

• Costs to build, acquire, expand, or rehabilitate a child care facility
• Operating costs for a child care facility (in-house or contracted)
• Amounts paid under a contract with a child care provider, including third-party intermediaries that connect employers with care providers
• Amounts paid under a contract with a jointly-owned child care facility
• Child care resource and referral services provided to employees (i.e., helping employees find and access care, even without running a facility)

How large is the credit?

Starting with tax year 2026:

• 40% of qualified child care facility expenditures (50% for eligible small businesses)
• Plus 10% of qualified child care resource and referral expenditures
• Maximum credit: $500,000 per year ($600,000 for eligible small businesses), with both figures adjusted for inflation in future years

An “eligible small business” is generally one that meets the gross receipts test under IRC Section 448(c) — roughly under $32 million in average annual gross receipts as of 2026.

What exactly changed under OBBB?

The One Big Beautiful Bill Act (OBBB), enacted in 2025 as part of that year’s budget reconciliation package, is the law responsible for the 2026 overhaul of Section 45F. Specifically, starting with tax year 2026, OBBB:

• Raised the maximum annual credit from $150,000 to $500,000 ($600,000 for eligible small businesses), with both figures now indexed for inflation in future years
• Increased the credit rate on qualified child care facility expenditures from 25% to 40% (50% for eligible small businesses)
• Added a new 10% credit for qualified child care resource and referral expenditures, which wasn’t part of the credit rate structure before
• Expanded who counts as a qualifying arrangement, allowing expenses paid to third-party intermediaries that contract with child care facilities, and facilities that are jointly owned by the taxpayer with other businesses, to qualify as of amounts paid or incurred after December 31, 2025
• Defined “eligible small business” using the gross receipts test under IRC Section 448(c) — roughly $32 million in average annual gross receipts as of 2026 — to determine who gets the higher 50% rate and $600,000 cap

Together, these changes were aimed at fixing a longstanding problem: the old $150,000 cap and 25% rate were too small to incentivize many employers, especially smaller ones, which is part of why the credit was historically underused.

Is there a catch?

A few important ones:

• Nonrefundable: The credit can’t exceed the business’s tax liability for the year. However, unused credit can be carried back one year and carried forward up to 20 years.
• Nondiscrimination requirement: The child care benefit (or eligibility to use it) can’t favor highly compensated employees. It has to be available on a fair basis across the workforce.
• Basis reduction: If the credit is based on the cost of building or improving a facility, the business must reduce the facility’s tax basis by the credit amount.
• Fair market value cap: Expenditures in excess of the fair market value of the care don’t count.

Does an employer need to build its own day care center to qualify?

No. That’s one of the most useful updates. Employers can now qualify by contracting with third-party intermediaries who arrange child care, or by participating in a jointly-owned child care facility with other businesses — not just by operating a facility themselves. This makes the credit accessible to businesses that can’t justify building or running a full facility on their own.

How does an employer claim the credit?

Employers calculate and claim the credit using IRS Form 8882, “Credit for Employer-Provided Childcare Facilities and Services.” The credit is part of the general business credit, which combines dozens of individual credits under a shared set of limits based on the business’s overall tax liability.

What’s in it for employees?

While the credit itself is claimed by the employer, employees benefit indirectly and sometimes directly:

• Access to child care they might not otherwise be able to afford or find, whether through an on-site facility, a contracted provider, or referral services
• Reduced financial and logistical burden of arranging care, which can ease stress and improve work-life balance
• Improved job satisfaction and retention incentives, since employer-sponsored child care is a benefit that’s rare enough to be a genuine differentiator
• Fair access by design, since the nondiscrimination rule means the benefit can’t be reserved for executives or top earners only

Why would an employer bother offering this benefit?

A few common reasons:

• Recruiting and retention: Child care support is a high-value, hard-to-find benefit that can help attract and keep skilled employees, particularly parents of young children.
• Reduced absenteeism: Employees with reliable child care tend to have fewer unplanned absences and less disruption from care gaps.
• Direct cost offset: The credit directly reduces the after-tax cost of providing the benefit, which the 2026 changes made meaningfully more generous.
• Flexibility: Employers aren’t locked into building a facility — contracting with a provider, joining a shared facility, or simply offering referral services can all qualify.

How is this different from a Dependent Care Assistance Program (DCAP)?

They’re related but separate. A DCAP is an employee benefit that lets workers set aside pre-tax dollars (up to $7,500 in 2026) to pay for their own qualifying dependent care expenses. Section 45F, by contrast, is a business tax credit for the employer’s own spending on child care infrastructure, contracts, or referral services. DCAP expenses don’t count toward the 45F credit — they’re two distinct tools, and some employers use both as part of a broader family-friendly benefits package.

Is this credit widely used?

Historically, no — take-up has been low, largely because the credit amount didn’t justify the cost and complexity for many businesses, especially smaller ones. The 2026 changes were designed specifically to address that gap by raising the credit percentage and dollar cap, and by opening the door to lower-cost options like intermediary contracts and shared facilities.