The IRS Just Quadrupled This Tax Credit — Small Businesses Can Now Claim Up to $600,000

For tax years starting after December 31, 2025, one of the most overlooked credits in the tax code just got a lot harder to ignore. The employer-provided child care tax credit — Section 45F, if you want to sound like your accountant — jumped from a $150,000 maximum to $500,000 for most businesses, and $600,000 for businesses that qualify as "eligible small businesses." The credit rate itself rose too, from 25% of qualifying expenses to 40%, or 50% for those same small businesses. That's not a rounding adjustment. That's the IRS quadrupling the ceiling on a benefit most small business owners have never claimed, largely because almost nobody knew it existed at a size worth bothering with.

Now it might be.

What changed, in plain terms

The expansion comes out of the One Big Beautiful Bill Act, and the IRS has since issued formal guidance confirming how it applies starting with the 2026 tax year. Before this change, a business that spent money helping employees access child care — building an on-site facility, contracting with a local daycare, or paying into a child care resource and referral service — could claim a credit worth 25% of those costs, capped at $150,000. For most small businesses, that cap made the credit barely worth the paperwork.

Under the new rules:

• The credit rate rises to 40% of qualifying expenditures for most employers.
• Businesses that meet the "eligible small business" definition get a 50% credit rate instead.
• The maximum credit rises to $500,000 generally, and $600,000 for eligible small businesses.
• Both dollar caps will be adjusted annually for inflation going forward.

Who counts as an "eligible small business"

This is the detail that matters most if you're trying to figure out whether you get the 40% rate or the better 50% rate. An eligible small business is generally one whose average gross receipts over the preceding five years fall below a set threshold — $31 million as of 2025, adjusted for inflation going forward. That threshold is high enough that the overwhelming majority of businesses reading this qualify for the top rate and the $600,000 cap, not just the base version most coverage of this credit assumes.

In other words: this isn't a credit aimed at Fortune 500 companies with corporate daycare centers. It's specifically more generous for the businesses that usually get squeezed out of benefits like this — the ones too small to build an on-site facility but big enough to have real payroll and real employees asking about child care support.

What actually qualifies as a childcare expense

The expanded rule also widened what counts. Qualifying expenditures now explicitly include:

• Costs of acquiring, constructing, rehabilitating, or expanding property used as a qualified child care facility.
• Operating costs for a child care facility, including training for staff and scholarship-style assistance.
• Payments to third-party intermediaries that contract with child care facilities on the employer's behalf — a significant expansion, since most small businesses were never going to build their own daycare but might well pay a service to secure employee slots at existing ones.
• Facilities jointly owned by the employer with other businesses, which opens the door for a handful of small businesses in a shopping center or office park to split the cost of a shared arrangement.
• Child care resource and referral expenditures, credited at 10%, which cover helping employees find and access care rather than paying for it directly.

Why this is a retention play, not just a tax play

Access to affordable, reliable child care remains one of the top reasons employees — especially parents of young children — leave jobs or turn down hours. A credit that offsets up to half the cost of solving that problem for your team is arguably one of the highest-leverage retention tools available to a small employer right now, and unlike a straight raise, it comes with the government picking up a meaningful share of the cost.

For businesses competing for hourly workers against companies with deeper benefits budgets, this credit narrows the gap. A modest child care assistance program that might have cost $40,000 a year out of pocket could now return $20,000 of that directly as a tax credit for a business earning the 50% small-business rate.

How to actually claim it

The mechanics run through IRS Form 8882, Credit for Employer-Provided Child Care Facilities and Services, which then flows into your general business credit. A few practical steps before you assume you qualify:

• Confirm your entity has an EIN in good standing. You'll need it to file Form 8882 and any related business returns. If you're not sure yours is set up correctly, review the basics of getting an EIN number before tax season gets busy.
• Check how your business structure affects the credit. How the credit passes through to owners can differ depending on whether you're structured as an LLC, an S corp, or something else. It's worth understanding the practical differences between an LLC and an S corp if you're unsure how credits flow to your personal return.
• Track qualifying expenses separately in your books now. Waiting until tax time to reconstruct what you spent on child care support makes the credit much harder to substantiate. Build a dedicated line item into your profit and loss statement so the numbers are ready when your preparer asks.
• Talk to a tax professional before committing to a structure. Whether a third-party intermediary arrangement or a jointly-owned facility makes more sense depends heavily on your headcount, your local child care market, and your budget.

The catch worth knowing

None of this is retroactive — it applies to costs incurred in tax years starting after December 31, 2025, so 2025 expenses don't qualify under the new, higher caps. And the credit still requires real spending on real child care support; it isn't a credit you can claim without actually setting up some form of program. But for a small business already considering child care benefits as a way to compete for workers, the math just got dramatically better.

Bottom line

A tax credit that used to top out at $150,000 now tops out at $600,000 for the small businesses it was arguably always meant to help most. If child care access has ever come up as a reason an employee left, cut hours, or turned down a promotion, this is the year that solving it got a lot cheaper.

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