Child-care costs are climbing faster than overall inflation, straining working parents—and the employers who rely on them. Section 45F of the Internal Revenue Code offers a direct way to help: a federal credit (up to $150,000) that reimburses part of the expense when a business builds, subsidizes, or arranges childcare for its workforce. 

How the credit works

Understanding how the credit works is fairly simple. The annual credit equals 25% of qualified facility expenditures plus 10% of qualified resource and referral costs, subject to the $150,000 cap. There are no restrictions on the size of the business as long as certain qualifications are met: 

Qualified facility expenditures

Qualified facility costsmay include the acquisition, construction, expansion, or day-to-day operation of a licensed center that primarily serves employees’ children. To qualify, the facility must comply with all state and local licensing requirements, be accessible to all employees, and cannot discriminate in favor of highly compensated employees. 

If the daycare center is also the owner’s core business, at least 30% of enrollees must be dependents of employees. Written contracts, detailed invoices, and up-to-date licences are a must because the IRS can disallow the credit if documentation is incomplete.

It is also important to note than if the facility ceases operations or is sold within 10 years, the credit may be subject to recapture. 

Resource & referral services

Resource and referral services are another way to help parents find reliable care, and they can qualify for the credit if certain conditions are met. To be eligible, the organization must cover the costs under a written contract for childcare referral services.

This doesn’t mean you can just create an internal spreadsheet of local centers – it’s designed to reimburse a share of expenses when you help employees secure professional childcare. 

In practice, employers typically sign an annual or multi-year agreement with one of three types of vendors: 

• A regional childcare resource agency that maintains a database of licensed providers, staffs a helpline, and offers individualized placement counseling.
• A single licensed center or consortium of centers that agrees to reserve slots, keep waiting list data current, and match families with openings.
• A national platform such as Care.com or Bright Horizons’ network, purchased on a per-employee-subscription or per-use basis. 

Vendors usually bill companies for setup fees, monthly access, or service charges, and these payments typically qualify as resource and referral expenses. 

Combining facility and referral credits

Both qualified facility expenses and referral expenses can coexist. An employer with an on-site center may still have remote staff, shift workers, or employees who can’t use the on-site facility. A referral service contract can potentially cover those employees, and the resulting costs produce another credit (also subject to the $150,000 ceiling). 

Claiming the credit

To claim the Employer-Provided Childcare Tax Credit, employers should complete Form 8882, “Credit for Employer-Provided Childcare Facilities and Services.” Then, transfer the figure to Form 3800, “General Business Credit.” Pass-through entities must still file Form 8882 at the entity level, and the credit flows to owners on Schedule K-1. Owners then claim the credit on their own Form 3800. 

The credit is non-refundable and is subject to general business credit rules. If you cannot claim the full credit in the current year, you may carryback the unused credit one year and carryforward 20 years after the year of the credit.

One important tip: keep excellent records. It is essential to maintain detailed documentation, including invoices, contracts, and licensing records, to substantiate your claim. Because part of your facility’s costs is offset by this credit, adjustments must be made to your basis and related deductions to ensure no double benefit is taken.

Common challenges and mistakes

The most frequent issues are misclassifying expenses (e.g., treating toys or snacks as credit-eligible capital costs), failing to maintain contemporaneous records, and structuring programs that inadvertently benefit only executives. A pre-implementation compliance review can prevent expensive amendments later.

It is also important to look at how the Employer-Provided Childcare Tax Credit fits into your larger tax planning. If you are using other deductions or incentives related to childcare, you want to avoid double-dipping. Carefully reviewing the options—and how they overlap—can help your business maximize the benefits.

Moving forward

Considering on-site care or referral partnerships with childcare providers? We’ll help you assess the costs, benefits, and rules. Contact our office for personalized guidance.