PRIA, Government Policy, Made Personal

Summary

Employers can get a tax credit for helping pay for child care. The credit equals 40% of qualified child care costs (50% if the employer is an eligible small business) plus 10% of qualified child care resource and referral costs. The credit for any year cannot be more than $500,000 (or $600,000 for an eligible small business). For tax years beginning after 2026, those caps will be raised for inflation using the cost-of-living rule in section 1(f)(3), but with “calendar year 2025” substituted for “calendar year 2016.” Qualified child care expenditures cover building or improving a child care facility (not part of a home), running costs (including staff training, scholarships, and higher pay for better-trained staff), or contracting for care. A qualified facility is mainly used for child care, follows state and local rules and licensing, is open to the employer’s employees, is not mainly the operator’s home, and must not favor highly paid workers. Resource and referral costs are contracts that help employees find child care and also must not favor highly paid workers. An eligible small business meets the gross-receipts test in section 448(c) but uses 5-year rules instead of 3-year rules. If the facility stops operating as child care or the owner sells it (unless the buyer agrees in writing to take on the credit’s recapture), some or all of the credit can be taken back. The amount taken back is the recapture percentage times the earlier credit reduction. The recapture percentage is 100% in years 1–3, 85% in year 4, 70% in year 5, 55% in year 6, 40% in year 7, 25% in year 8, 10% in years 9–10, and 0% in year 11 and later. Year 1 starts on the first day of the taxable year when the facility is first placed in service. Related employer groups are treated as one taxpayer, partnerships must follow allocation rules, and estates and trusts follow pass-through rules. The credit reduces the property’s tax basis, recapture can adjust that basis back, and no other tax break can be claimed for the same amount. The Treasury must issue rules and guidance to carry out these provisions.

Title 26, §45F

Internal Revenue Code, Source: USLM XML via OLRC

(a)In general

For purposes of section 38, the employer-provided child care credit determined under this section for the taxable year is an amount equal to the sum of— (1)

(2)10 percent of the qualified child care resource and referral expenditures,

of the taxpayer for such taxable year.

(b)Dollar limitation

(1)In general

The credit allowable under subsection (a) for any taxable year shall not exceed $500,000 ($600,000 in the case of an eligible small business).

(2)Inflation adjustment

In the case of any taxable year beginning after 2026, the $500,000 and $600,000 amounts in paragraph (1) shall each be increased by an amount equal to—

(A)such dollar amount, multiplied by

(B)the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2025” for “calendar year 2016” in subparagraph (A)(ii) thereof.

(c)Definitions

For purposes of this section

(1) Qualified child care expenditure

(2)Qualified child care facility

(A)In general

The term “qualified child care facility” means a facility—

(i)the principal use of which is to provide child care assistance, and

(ii)which meets the requirements of all applicable laws and regulations of the State or local government in which it is located, including the licensing of the facility as a child care facility.

Clause (i) shall not apply to a facility which is the principal residence (within the meaning of section 121) of the operator of the facility.

(B)Special rules with respect to a taxpayer

A facility shall not be treated as a qualified child care facility with respect to a taxpayer unless—

(i)enrollment in the facility is open to employees of the taxpayer during the taxable year,

(ii)if the facility is the principal trade or business of the taxpayer, at least 30 percent of the enrollees of such facility are dependents of employees of the taxpayer, and

(iii)the use of such facility (or the eligibility to use such facility) does not discriminate in favor of employees of the taxpayer who are highly compensated employees (within the meaning of section 414(q)).

(C)Treatment of jointly owned or operated child care facility

A facility shall not fail to be treated as a qualified child care facility of the taxpayer merely because such facility is jointly owned or operated by the taxpayer and other persons.

(3)Qualified child care resource and referral expenditure

(A)In general

The term “qualified child care resource and referral expenditure” means any amount paid or incurred under a contract to provide child care resource and referral services to an employee of the taxpayer.

(B)Nondiscrimination

The services shall not be treated as qualified unless the provision of such services (or the eligibility to use such services) does not discriminate in favor of employees of the taxpayer who are highly compensated employees (within the meaning of section 414(q)).

(4)Eligible small business

The term “eligible small business” means a business that meets the gross receipts test of section 448(c), determined—

(A)by substituting “5-taxable-year” for “3-taxable-year” in paragraph (1) thereof, and

(B)by substituting “5-year” for “3-year” in paragraph (3)(A) thereof.

(d)Recapture of acquisition and construction credit

(1)In general

If, as of the close of any taxable year, there is a recapture event with respect to any qualified child care facility of the taxpayer, then the tax of the taxpayer under this chapter for such taxable year shall be increased by an amount equal to the product of— (A)

(B)the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted if the qualified child care expenditures of the taxpayer described in subsection (c)(1)(A) with respect to such facility had been zero.

(2)Applicable recapture percentage

(A)In general

For purposes of this subsection, the applicable recapture percentage shall be determined from the following table:

If the recapture event occurs in: | The applicable recapture percentage is:

Years 1–3 | 100

Year 4 | 85

Year 5 | 70

Year 6 | 55

Year 7 | 40

Year 8 | 25

Years 9 and 10 | 10

Years 11 and thereafter | 0.

(B)Years

For purposes of subparagraph (A), year 1 shall begin on the first day of the taxable year in which the qualified child care facility is placed in service by the taxpayer.

(3)Recapture event defined

For purposes of this subsection, the term “recapture event” means—

(A)Cessation of operation

The cessation of the operation of the facility as a qualified child care facility.

(B)Change in ownership

(i)In general

Except as provided in clause (ii), the disposition of a taxpayer’s interest in a qualified child care facility with respect to which the credit described in subsection (a) was allowable.

(ii)Agreement to assume recapture liability

Clause (i) shall not apply if the person acquiring such interest in the facility agrees in writing to assume the recapture liability of the person disposing of such interest in effect immediately before such disposition. In the event of such an assumption, the person acquiring the interest in the facility shall be treated as the taxpayer for purposes of assessing any recapture liability (computed as if there had been no change in ownership).

(4)Special rules

(A)Tax benefit rule

The tax for the taxable year shall be increased under paragraph (1) only with respect to credits allowed by reason of this section which were used to reduce tax liability. In the case of credits not so used to reduce tax liability, the carryforwards and carrybacks under section 39 shall be appropriately adjusted.

(B)No credits against tax

Any increase in tax under this subsection shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.

(C)No recapture by reason of casualty loss

The increase in tax under this subsection shall not apply to a cessation of operation of the facility as a qualified child care facility by reason of a casualty loss to the extent such loss is restored by reconstruction or replacement within a reasonable period established by the Secretary.

(e)Special rules

For purposes of this section

(1) Aggregation rules

(2)Pass-thru in the case of estates and trusts

Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply.

(3)Allocation in the case of partnerships

In the case of partnerships, the credit shall be allocated among partners under regulations prescribed by the Secretary.

(f)No double benefit

(1)Reduction in basis

For purposes of this subtitle—

(A)In general

If a credit is determined under this section with respect to any property by reason of expenditures described in subsection (c)(1)(A), the basis of such property shall be reduced by the amount of the credit so determined.

(B)Certain dispositions

If, during any taxable year, there is a recapture amount determined with respect to any property the basis of which was reduced under subparagraph (A), the basis of such property (immediately before the event resulting in such recapture) shall be increased by an amount equal to such recapture amount. For purposes of the preceding sentence, the term “recapture amount” means any increase in tax (or adjustment in carrybacks or carryovers) determined under subsection (d).

(2)Other deductions and credits

No deduction or credit shall be allowed under any other provision of this chapter with respect to the amount of the credit determined under this section.

(g)Regulations and guidance

The Secretary shall issue such regulations or other guidance as may be necessary to carry out the purposes of this section, including guidance to carry out the purposes of paragraphs (1)(A)(iii) and (2)(C) of subsection (c).

Notes & Related Subsidiaries

Editorial Notes

Amendments

2025—Subsec. (a)(1). Pub. L. 119–21, § 70401(a), substituted “40 percent (50 percent in the case of an eligible small business)” for “25 percent”. Subsec. (b). Pub. L. 119–21, § 70401(b), amended subsec. (b) generally. Prior to amendment, text read as follows: “The credit allowable under subsection (a) for any taxable year shall not exceed $150,000.” Subsec. (c)(1)(A)(iii). Pub. L. 119–21, § 70401(d), inserted “, or under a contract with an intermediate entity that contracts with one or more qualified child care facilities to provide such child care services” before period at end. Subsec. (c)(2)(C). Pub. L. 119–21, § 70401(e), added subpar. (C). Subsec. (c)(4). Pub. L. 119–21, § 70401(c), added par. (4). Subsec. (g). Pub. L. 119–21, § 70401(f), added subsec. (g). 2002—Subsec. (d)(4)(B). Pub. L. 107–147 substituted “this chapter or for purposes of section 55” for “subpart A, B, or D of this part”.

Statutory Notes and Related Subsidiaries

Effective Date

of 2025 Amendment Pub. L. 119–21, title VII, § 70401(g), July 4, 2025, 139 Stat. 213, provided that: “The

Amendments

made by this section [amending this section] shall apply to amounts paid or incurred after December 31, 2025.”

Effective Date

of 2002 AmendmentAmendment by Pub. L. 107–147 effective as if included in the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107–16, to which such amendment relates, see section 411(x) of Pub. L. 107–147, set out as a note under section 25B of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 2001, see section 205(c) of Pub. L. 107–16, set out as an

Effective Date

of 2001 Amendment note under section 38 of this title.

§45F Employer-provided Child Care Credit

Summary

Title 26, §45F

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Amendments

Effective Date

Effective Date

Effective Date

Citations & Metadata