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Fed Tax Incentives:
Employer-Provided Childcare Facilities & Services Credit

Background 


The Employer-Provided Childcare Facilities and Services Credit is a component of the general business credit under IRC § 38 and is codified under 26 U.S.C. § 45F of the Internal Revenue Code (IRC). It provides a nonrefundable credit to employers that incur qualified childcare facility or resource-and-referral expenditures. IRC §§ 38(b)(18), 45F(a)–(b). The credit equals 25% of qualified childcare facility expenditures and 10% of qualified childcare resource and referral expenditures, capped at $150,000 per tax year. IRC § 45F(a)–(b); IRS Tax Tip 2025-39.

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Eligibility & Non-Discrimination

Enrollment in the facility must be open to all employees, and neither facility use nor resource-and-referral services may discriminate in favor of highly compensated employees as defined in IRC § 414(q). See also IRC § 45F(c)(2)(B)(i), (c)(3)(B), § 414(q). If the facility is the taxpayer’s principal trade or business, at least 30% of enrollees must be dependents of employees. IRC § 45F(c)(2)(B)(ii).

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Highly Compensated Employee (IRC § 414(q))

In general, the term "highly compensated employee" means any employee who

  • (i) owned more than 5% of the employer at any time during the current or preceding year, or (ii) received compensation above the indexed threshold for the preceding year (e.g., $150,000 for 2025), and

  • if elected by the employer, was in the top-paid group. See IRC § 414(q); IRS Retirement Plan Definitions.

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Qualified Childcare Expenditures

Qualified childcare expenditures include (see IRC § 45F(c)(1)(A)(i)–(iii)) any amount paid or incurred-:

  • to acquire, construct, rehabilitate, or expand property-

    • which is to be used as part of a qualified child care facility of the taxpayer,

    • with respect to which a deduction for depreciation (or amortization in lieu of depreciation) is allowable, and

    • which does not constitute part of the principal residence (within the meaning of 26 USC §121) of the taxpayer or any employee of the taxpayer,​

  • operating costs of a qualified child care facility including costs related to-

    • the training of employees,

    • to scholarship programs, and

    • to the providing of increased compensation to employees with higher levels of child care training; and ​

  • under a contract with a qualified child care facility to provide child care services to employees of the taxpayer, or under a contract with an intermediate entity that contracts with one or more qualified child care facilities to provide such child care services. 

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Qualified Childcare Resource & Referral Expenditures

Amounts paid under a contract to provide childcare resource and referral services to employees. Services must not discriminate in favor of highly compensated employees (as defined in IRC § 414(q)).
IRC § 45F(c)(3)(A)–(B).

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Exclusion: Qualified childcare expenditures do not include costs exceeding the fair market value of the care provided. See IRC § 45F(c)(1)(B).

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Qualified Childcare Facility

A facility qualifies if (see IRC § 45F(c)(2)(A)–(B)):

  • Principal use is to provide childcare assistance;

  • Meets all applicable state/local laws and licensing requirements;

  • Is not the operator’s principal residence;

  • Enrollment is open to employees during the taxable year;

  • Use of the facility (or eligibility to use it) must not discriminate in favor of highly compensated employees;

  • If the facility is the taxpayer’s principal trade or business, ≥ 30% of enrollees must be dependents of employees.

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Coordination & Basis Rules

  • Deductions for otherwise allowable expenditures must be reduced by the credit amount.

  • Basis of property for which the credit is allowed must be reduced by the portion of the credit attributable to such property. See IRC § 45F(e)(1)–(2).

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Aggregation & Carryovers

  • Controlled-group and common-control rules under §§ 41(f) and 52 apply.

  • Credit is part of the general business credit and subject to § 39 carryback/carryforward (one-year back, 20 years forward). See IRC §§ 45F(e)(4), 38, 39.

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Recapture Rules

If a qualified childcare facility ceases to qualify within 10 years of being placed in service, recapture applies (IRC § 45F(d)(1)–(2)):

  • Years 1–3: 100%

  • Year 4: 85%

  • Year 5: 70%

  • Year 6: 55%

  • Year 7: 40%

  • Year 8: 25%

  • Years 9–10: 10%

  • After Year 11: 0%

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IRS Links, Notices, & Filing Requirements​
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