The employer-provided childcare tax credit under IRC §45F has existed since 2001, but the credit was modest enough that most businesses never seriously considered it. The One Big Beautiful Bill Act changed that. Starting with tax year 2025, the credit rate nearly doubled, the annual cap tripled, and new eligible expense categories were added. For companies with childcare costs, this is now one of the largest available general business credits.
What Changed Under OBBBA
The pre-OBBBA credit was calculated at 25% of qualified childcare facility expenditures plus 10% of childcare resource and referral costs, with a combined cap of $150,000. That structure made the credit inaccessible for all but the smallest childcare arrangements.
The OBBBA changed three things, effective for tax years beginning after December 31, 2024:
- Facility credit rate: 25% raised to 40% (or 50% for qualifying small businesses)
- Annual cap: $150,000 raised to $500,000 (or $600,000 for qualifying small businesses)
- Eligible expenses expanded: intermediary contracts and jointly-owned facilities now count
The 10% resource and referral rate was not changed.
How the Credit Is Calculated
Who Qualifies as a Small Business
The enhanced 50% rate and $600,000 cap apply to businesses that meet the §448(c) gross receipts test: average annual gross receipts of $32 million or less for the three prior tax years. This threshold is the same test used for the cash method of accounting election and various other small-business provisions. The $32 million figure is indexed for inflation going forward.
Qualified Childcare Facility Expenses
To count, the facility must be a qualified childcare facility: principal use is providing childcare, it meets state and local licensing requirements, and it is not the principal residence of the employer or employee. Qualifying expenses include:
- Construction, acquisition, or rehabilitation of childcare facility property
- Day-to-day operating costs paid by the employer
- Amounts paid to a third-party childcare provider under contract
- Fees paid to intermediaries that contract with qualifying facilities (new under OBBBA)
- Costs for jointly-owned or jointly-operated facilities with other businesses (new under OBBBA)
Recapture Rules
If a qualified childcare facility is disposed of or stops qualifying within 10 years of being placed in service, the credit is subject to recapture. The recapture percentage starts at 100% in year one and steps down by 10 percentage points each year. This applies to both the original owner and, under certain circumstances, successors.
How to Claim the Credit
The §45F credit is a nonrefundable general business credit. Claim it on Form 8882, Credit for Employer-Provided Childcare Facilities and Services, which flows to Form 3800 (General Business Credit). Unused credit can be carried back one year and forward 20 years.
The credit reduces the employer's deduction for the underlying expenses. If a company claims $200,000 in facility expenses and receives an $80,000 credit (40%), it must reduce its deduction for those expenses by $80,000.
Planning Considerations
Joint facilities are now viable. The OBBBA expanded §45F to cover jointly-owned childcare facilities, making it feasible for neighboring businesses or a landlord/tenant group to share a facility and each claim the credit on their proportionate share of expenses.
Run the credit against the deduction reduction. The deduction offset reduces the net tax benefit, but the credit is generally still worthwhile. A business in the 21% corporate tax rate that spends $1,000,000 on childcare expenses, claims a $400,000 credit, and loses a $400,000 deduction worth $84,000 nets $316,000 in tax savings.
Check state conformity. Not all states have adopted the OBBBA changes to §45F. Verify your state's treatment before projecting the combined federal and state benefit.
For help calculating whether the §45F credit applies to your situation, contact TS CPA.