The final version of the 2025 tax reconciliation package (the One Big Beautiful Bill Act, H.R.1, P.L. 119-21) was signed into law on July 4th, 2025. The bill included a significant expansion of Section 45F of the Internal Revenue Code. The expanded credit applies to amounts paid or incurred after December 31, 2025.
Section 45F under the Internal Revenue Code provides for an income tax credit designed to encourage businesses to invest in child care support for working families. The One Big Beautiful Bill Act substantially expanded the credit, broadened the types of expenses that are eligible under the credit, and made it easier for small businesses to work together to provide support jointly to their employees.
| Feature | Pre–2025 | 2026 and Later |
| % of qualified child care expenditures credited | 25% | 40% (or 50% for eligible small businesses) |
| % of qualified child care resource and referral expenditures credited | 10% | 10% |
| Maximum annual credit | $150,000 | $500,000 (or $600,000 for eligible small businesses) |
| Pooling resources allowed | Not addressed | Yes |
| What counts as qualified expenses | Facility costs, some services | Broader: facility, contracted, agency, referral |
| Credit indexed for inflation | No | Yes beginning after 2026 |
| Filing method | Form 8882 | Form 8882 |
Expanded Tax Credit
The credit rate and caps expanded to 40% of qualified child care expenditures, up to $500,000, for most employers, and 50%, up to $600,000, for eligible small businesses. The changes apply to amounts paid or incurred after December 31, 2025. Expenses paid or incurred in 2025 or earlier remain subject to the 25% rate and the $150,000 cap.
Qualified Child Care Expenditures
Qualified child care expenditures are amounts paid or incurred to:
- Acquire, construct, rehabilitate or expand property that is:
- To be used as part of a qualified child care facility of the taxpayer,
- Depreciable (or amortizable) property, and
- Not part of the principal residence (within the meaning of IRC Section 121) of the taxpayer or any employee of the taxpayer; or
- Operate a qualified child care facility of the taxpayer. This includes training employees, providing scholarship programs, and providing increased compensation to employees with higher levels of child care training; or
- Contract with a qualified child care facility to provide child care services to employees of the taxpayer, or contract with a third-party intermediary entity that contracts with one or more qualified child care facilities to provide such child care services.
Qualified child care expenditures do not include expenses in excess of the fair market value of that care.
Qualified Child Care Facility
A qualified child care facility is a space that meets the requirements of all applicable laws and regulations of the state or local government where it is located, including licensing as a child care facility. The facility must also meet these conditions:
- The principal use of the facility must be to provide child care assistance, unless the facility is also the principal residence (within the meaning of IRC Section 121) of the person operating the facility;
- Enrollment in the facility must be open to employees of the taxpayer during the taxable year;
- If the facility is the principal trade or business of the taxpayer, at least 30% of the enrollees of the facility must be dependents of employees of the taxpayer; and
- The use of the facility (or the eligibility to use the facility) must not discriminate in favor of highly compensated employees (within the meaning of IRC Section 414(q)).
As part of amendments to Section 45F, a jointly-owned or operated child care facility may now qualify as a qualified child care facility.
Qualified Resource and Referral Expenditures
Qualified resource and referral expenditures are amounts paid or incurred under a contract to provide child care resource and referral services to your employees.
The provision of the services (or the eligibility to use the services) must not discriminate in favor of highly compensated employees.
Eligible Small Business
A small business may qualify for the higher 50% rate and $600,000 maximum credit if it meets the gross receipts test of IRC Section 448(c), measured over a 5-year period. For taxable years beginning in 2026, this means average annual gross receipts over the preceding five years of no more than $32 million. The $500,000 and $600,000 caps are adjusted for inflation for taxable years beginning after 2026.
Pooling Resources
Businesses can now join together to pool resources and contract with licensed childcare providers, or jointly own or operate a child care facility, allowing all participating businesses to claim a share of the tax credit under Section 45F. This collaboration lowers the costs and administrative burden for each company while providing quality childcare access to their employees.
Example 1: Two small businesses, Smith Manufacturing and Jones Realty, partner with ABC Child Care:
- Smith pays $80,000; Jones pays $60,000.
- Each company can claim 50% of its share: Smith claims $40,000 credit, Jones claims $30,000 credit.
Both must file IRS Form 8882 and keep documentation of the expenses and partnership agreement.
Example 2: A group of four small businesses jointly contract with XYZ Playhouse, agreeing to split the $200,000 child care contract evenly amongst the businesses.
- Each business pays $50,000 to XYZ Playhouse.
- Each business claims a $25,000 credit (50% of $50,000).
The conditions above apply with respect to each taxpayer.
Interaction with the Business Expense Deduction
If an employer incurs qualified child care expenditures in excess of the maximum allowable credit amount under Section 45F, the excess can still be deducted as a business expense.
Example: Johnson Logistics, a small business, contracts with ABC Academy and pays $1 million in expenses.
- Johnson can claim a $500,000 tax credit under Section 45F, which is 50% of $1 million and below the $600,000 cap for eligible small businesses.
- Johnson may also claim a business expense deduction for its child care expenses, but it must reduce that deduction by the $500,000 credit, leaving $500,000 deductible.
Basis Reduction and Recapture
An employer that claims the credit on the cost of acquiring, constructing, rehabilitating, or expanding a facility must reduce the property’s tax basis by the amount of the credit.
The credit is also subject to recapture. An employer may have to recapture part or all of the credit if, before the 10th tax year after the tax year in which the facility is placed in service, the facility ceases to operate as a qualified child care facility or there is a change in ownership of the facility. A change in ownership does not require recapture if the person acquiring the interest agrees in writing to assume the recapture liability.
Claiming the Credit
Employers claim the credit on IRS Form 8882. Section 45F provides that the credit is determined for purposes of Section 38, so it forms part of the general business credit. The limits on how much of the general business credit an employer can use in a given year sit outside Section 45F. An employer should work through them with its tax advisor.
The IRS has not yet issued a revised Form 8882. As of September 2026, the version posted on irs.gov is the December 2017 revision, which computes 25% and caps the credit at $150,000. Employers filing for 2026 should watch for an updated form.
Guidance Still to Come
Congress directed Treasury to issue regulations or other guidance carrying out Section 45F, including guidance on the intermediate entity and joint ownership provisions. Employers building arrangements that rely on either provision should expect further detail from the IRS.
To learn more about other federal tax credits that can make child care more affordable, view our other blog post on the One Big Beautiful Bill Act.
*This information is only a summary of the IRC Section 45F and does not constitute legal or financial advice. Employers looking to explore the employer-provided child care credit should consult with their legal counsel and/or tax advisors.
