Finding and keeping talented employees remains one of the biggest challenges for many businesses. As employers look for meaningful ways to enhance their benefits packages, child care support has become an increasingly valuable offering. Thanks to recent tax law changes, the employer-provided child care credit has become significantly more attractive beginning in 2026, potentially making workplace child care solutions more financially viable for businesses of all sizes.
Whether you’re considering building a child care facility, partnering with an existing provider, or joining forces with other employers to offer child care services, understanding these new tax incentives can help you make an informed decision.
How the Employer-Provided Child Care Credit Has Expanded
The federal tax credit under Internal Revenue Code Section 45F rewards employers that help provide child care resources for their workforce.
Starting in 2026, businesses can claim:
- A credit equal to 40% of qualified child care facility expenditures (up from 25%)
- A credit equal to 10% of qualified child care resource and referral expenditures
- A maximum annual credit of $500,000, increased from $150,000 in 2025
Beginning in 2027, the annual credit limit will be indexed for inflation, potentially increasing the benefit over time.
For employers evaluating family-friendly workforce benefits, these enhancements may significantly reduce the after-tax cost of providing child care assistance.
Enhanced Benefits for Small Businesses
Congress also expanded the credit for qualifying small businesses.
Eligible small employers may claim:
- 50% of qualified child care facility expenses
- 10% of qualified child care resource and referral expenses
- A maximum annual credit of $600,000 in 2026
The higher limit will also receive annual inflation adjustments in future years.
Generally, a business qualifies for the enhanced credit if its average annual gross receipts during the previous five tax years fall below the applicable threshold. For 2026, that threshold is $32 million.
Another important change allows eligible small businesses to collaborate with other employers to offer child care services. Businesses may also utilize third-party intermediaries to coordinate child care arrangements, creating additional flexibility for organizations that lack the resources to operate a facility independently.
What Expenses Qualify for the Employer-Provided Child Care Credit?
Businesses may claim the employer-provided child care credit for several types of expenditures associated with child care services.
Facility Acquisition and Improvement Costs
Qualified expenses may include costs to:
- Purchase property for use as a child care facility
- Construct a new child care center
- Expand or renovate an existing facility
- Improve qualifying depreciable or amortizable property used in child care operations
The property cannot be part of the employer’s principal residence or an employee’s home.
Facility Operating Expenses
Employers may also qualify for credits related to ongoing operating costs, including:
- Employee compensation
- Staff training programs
- Day-to-day facility operations
- Child care scholarship programs
Contracted Child Care Services
Many employers may find it more practical to contract with an existing qualified child care provider. Payments made under qualifying service agreements may also be eligible for the credit.
However, expenditures exceeding the fair market value of the child care services provided are not considered qualified expenses.
Requirements for a Qualified Child Care Facility
To qualify for the credit, a child care facility must satisfy several conditions.
The facility must:
- Comply with all applicable state and local licensing requirements
- Be used primarily to provide child care services
- Be available to all employees during the tax year
- Avoid discrimination in favor of highly compensated employees
Additionally, if operating a child care facility is the employer’s principal trade or business, at least 30% of enrolled children must be dependents of the employer’s employees.
Additional Tax Rules Employers Should Understand
Before moving forward, it is important to consider several tax provisions that can affect the overall benefit.
Basis Reduction Rules
Employers cannot receive multiple tax benefits from the same expenditures. The tax basis of a qualified child care facility must be reduced by the amount of credit attributable to facility-related costs.
Likewise, businesses generally cannot claim additional deductions or credits based on the same expenses used to calculate this credit.
Credit Recapture Risk
The IRS may require repayment of some or all of the credit if:
- The facility stops operating as a qualified child care facility, or
- Ownership changes within ten years after the facility is placed in service
The potential recapture amount decreases gradually as time passes during the ten-year period.
General Business Credit Limitations
The credit is part of the broader general business credit system. As a result, annual usage may be limited based on your tax liability.
If you cannot use the full credit in the current year, unused amounts generally may be:
- Carried back one year, or
- Carried forward up to 20 years
Businesses claim the credit using IRS Form 8882.
Is Employer-Sponsored Child Care Right for Your Business?
While the expanded credit creates meaningful tax savings opportunities, providing child care remains a significant business commitment. Employers should carefully evaluate:
- Workforce demographics
- Employee demand for child care services
- Facility and operating costs
- Available local child care providers
- Compliance responsibilities and risk management concerns
Even when outsourcing services, businesses should perform thorough due diligence and regularly monitor provider quality and performance.
Is Employer-Sponsored Child Care a Smart Investment for Your Business?
The enhanced employer-provided child care credit could make child care benefits a more practical and cost-effective option for many employers beginning in 2026. However, every business has unique workforce needs, financial considerations, and operational requirements.
Before investing in a child care facility or entering into a provider agreement, it’s important to analyze both the tax savings and the long-term business implications. The team at Landmark CPAs can help you evaluate eligibility, estimate potential tax credits, and determine whether this benefit aligns with your overall business strategy.
Contact Landmark CPAs today to discuss how these expanded tax incentives may benefit your business and your employees.
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