Employers can use the larger Section 45F credit to offset child care support costs and make retention benefits cheaper to offer.
Why this matters for small employers
The IRS says the employer-provided child care credit under Section 45F is expanded for amounts paid or incurred after Dec. 31, 2025, making this a 2026 planning opportunity for employers. For small-business owners, the practical angle is straightforward: child care support can be treated less like a pure expense and more like a hiring and retention tool with a tax offset.
Under the updated rules, the credit equals 40% of qualified child care expenditures, or 50% for an eligible small business, plus 10% of qualified child care resource-and-referral expenditures. The annual cap rises from $150,000 to $500,000, or $600,000 for an eligible small business, with inflation indexing beginning after 2026. That gives employers more room to subsidize child care without carrying the full after-tax cost.
What employers can pay for
The IRS says qualified child care expenditures can include amounts paid or incurred to acquire, construct, rehabilitate, or expand property used as part of a qualified child care facility; to operate a qualified child care facility; or under a contract with a qualified child care facility to provide child care services to employees. The IRS also says amounts paid under a contract with an intermediate entity that contracts with one or more qualified child care facilities count for amounts paid or incurred after Dec. 31, 2025.
Operational spending can also qualify. The IRS says operating costs may include training employees, scholarship programs, and increased compensation to employees with higher levels of child care training. Resource-and-referral services are another option: the credit also applies to amounts paid or incurred under a contract to provide child care resource and referral services to employees.
Who is most likely to benefit
The IRS defines an eligible small business as one that meets the Section 448(c) gross-receipts test over the preceding five-year period. For taxable years beginning in 2026, a corporation or partnership generally meets that test for this credit if average annual gross receipts do not exceed $32 million. That means the expanded credit is not limited to very large employers; many local employers, agencies, franchises, and other midsize small businesses may be able to use it.
That matters because child care is often a hidden cost in recruiting and retention. If an employer can help cover child care directly, or contract for services through a qualified facility or referral provider, the tax credit can reduce the after-tax cost of a benefit that may help lower turnover, reduce absenteeism, and make job offers more competitive.
Compliance rules to check before spending
The IRS says a qualified child care facility must principally provide child care and comply with applicable state and local laws, including licensing. The facility also has special taxpayer-specific rules: enrollment must be open to employees of the taxpayer during the taxable year, and if the facility is the taxpayer’s principal trade or business, at least 30% of enrollees must be dependents of employees. The IRS also says the benefit cannot discriminate in favor of highly compensated employees.
There are also limits on how the credit works. The IRS says qualified child care expenditures cannot exceed fair market value, taxpayers may not claim another deduction or credit for the same expenditures, and if the credit is based on spending to acquire, construct, rehabilitate, or expand a facility, the basis of the facility must be reduced by the credit amount. Taxpayers claim the credit on Form 8882.
For small-business owners, the opportunity is not just to offer child care, but to model whether a subsidy, shared facility, or referral contract can become a cheaper retention benefit after the credit. The best use case is a benefit that improves hiring and attendance while staying inside the IRS rules and the fair-market-value limits.
