Challenges

Access, Scalability, Worker Issues

Location

Nationwide

Stakeholders

Businesses, Federal Government

Beneficiaries

Parents, Children, Childcare providers

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Overview

The IRS Employer-Provided Child Care Credit is a federal tax incentive that allows businesses to claim a credit of up to 40% of expenses incurred in providing childcare facilities and 10% of referral services, capped at $150,000 annually.

Key Impact Metrics

  • $144.7 to $154.8 million estimated corporate returns in qualified childcare facility expenses nationwide in the program
  • $15.7 to $18.8 million claimed in corporate income tax credits in 2016
  • 169 to 278 corporate income tax returns claimed in 2016
  • Tax credit increased from 25% to 40% or 50%, with an annual cap increase of $350,000 to $450,000

Problem

Access to affordable, high-quality childcare is a significant barrier for working parents, particularly in low-income or rural areas. Many employers struggle to recruit and retain talent due to a lack of childcare support, which contributes to workforce shortages and absenteeism. Yet, high costs and limited awareness of available incentives prevent employers from developing or supporting childcare services. This credit attempts to bridge the affordability and accessibility gap through tax-based support.

Solution

Established in 2001, the IRS Child Care Credit (IRS §45F) used to offer employers a non-refundable tax credit of 25% of expenses to acquire, construct, rehabilitate, or operate an on-site childcare facility, and 10% of costs for childcare resource and referral services, allowing up to $150,000 in credits per year. With the passage of the recent “One Big Beautiful Bill,” the credit has increased from 25% to 40% (up to a $500,000 annual cap) and a 50% credit for qualified small businesses (up to a $600,000 cap). This is set to go into effect on January 1, 2026. U.S. government data shows that this tax credit is underused; however, some employers are unaware of the credit. The hope is that with this updated credit, more employers will enlist in the program.

Results

  • Beneficiary Impact
    $144.7 to $154.8 million estimated corporate returns in qualified childcare facility expenses nationwide in the program
  • Employee Impact
    One study found that a $100 increase in IRS childcare tax benefits was associated with a 1.5% increase in maternal employment for the full sample
  • Financial Results
    $15.7 million to $18.8 million claimed in corporate income tax credits in 2016

Replication Tips

  • Review eligibility for off-site and referral-based childcare credits.
  • Partner with local or nationwide providers to lower capital costs for setting up facilities.
  • Bundle childcare with other family benefits (e.g., paid leave) to boost participation and usage of the tax credit.
  • Leverage tax professionals to signify compliance and claim procedures.
  • Use pooled or co-op models (multiple employers sharing one facility).
  • Advocate for state matching credits to increase financial feasibility.

Suggested Implementation Timeline

~12-18 months

Sources