What’s New Under Section 45F (WFTC)
For tax years beginning in 2026 and later, the Employer-Provided Child Care Credit (IRC Section 45F) has been significantly expanded:
- Credit cap increased: from $150,000 up to $500,000, or $600,000 for eligible small businesses. (irs.gov)
- Credit rate boosted: 25% → 40% of qualified child care expenditures, and 50% for eligible small businesses. Plus, resource and referral services qualify at 10%. (irs.gov)
Who Qualifies
Eligible employers must incur child care expenditures or resource & referral services for their employees in a qualified facility. Eligible small businesses are defined under IRC Section 448(c): generally, those whose average annual gross receipts over the previous five years do not exceed $32 million for taxable years beginning in 2026. (irs.gov)
What Counts as Qualified Expenditures
- Expenses for operating a child care facility used by employees or contracting with one. Must comply with state/local licensing laws.
- Costs of constructing, expanding, or rehabilitating a facility—but note recapture rules if the facility ceases operation or changes ownership within 10 years.
- Spending on training staff and compensation with higher levels of child care qualification is included.
How to Claim the Credit
- Use Form 8882 when filing your federal income tax return.
- Determine the sum of:
- 40% of qualified child care expenditures, or 50% for eligible small businesses; plus
- 10% of expenditures for child care resource & referral services.
- Never exceed the allowable cap ($500,000 or $600,000). Also reduce the basis of property used in the facility by the amount of the credit if expenditures were capitalized. (irs.gov)
Things to Watch Out For
- Double-dipping ban: You can’t use the same costs for both deductions and credits.
- Facility must be qualified: Licensing and legal compliance, day care laws, etc. Requirements vary by state.
- Recapture risk: If ownership changes or the facility closes within 10 years of being placed in service, part or all of the credit could be clawed back.
- Size matters: If you exceed the definition of an eligible small business, your credit rate and cap reset lower.
Example Scenario
A company that is not a small business spends $400,000 on operating costs for its child care facility in 2026.
- It qualifies for 40% × $400,000 = $160,000 credit.
- If it spent $600,000 and was an eligible small business, eligible for 50% → $300,000 credit, but clipped at cap if needed.
Final Takeaways
If you're an employer operating in 2026 and beyond with employee child care expenses, this expansion under Section 45F offers a powerful opportunity to lower your tax burden. Be sure to check status as “eligible small business,” confirm facility qualifications, and keep careful accounting to avoid recapture.
Consult your tax advisory or state licensing authority to align local regulations with federal credit requirements.