Alabama Child Care Tax Incentives
Current for 2026 Tax Year • Last Updated: January 24, 2026
Strategic 45F stacking for Alabama employers and Small Business Coalitions
The 2026 Alabama "Stack"
Alabama employers can achieve a powerful "Double Win" by combining the expanded federal Section 45F credit with the new state-level Employer Child Care Tax Credit.
Claim a tax credit for 40% (Large Business) or 50% (Small Business) of qualified child care expenses, up to $600,000 annually.
HB358 provides a credit of 75% (large employers) to 100% (small employers with ≤25 employees) of child care expenses, up to $600,000 per year.
💡 Alabama Strategy
Alabama's HB358 (Act 2024-303), effective January 1, 2025, makes the state one of the most attractive for employer-supported child care. However, critical restrictions apply that can significantly impact your actual savings. See the important caveats below.
⚠️ Critical Caveats for Alabama Employers
1. Non-Refundable & No Carryforward ("Use It or Lose It"): The Alabama credit is non-refundable and cannot be carried forward to future years. If your state tax liability is $15,000 but your credit is $230,000, you save only $15,000—the remaining $215,000 vanishes. You cannot get a "100% reimbursement" unless your state tax liability already equals or exceeds your child care spend.
2. $80,000 Employee Wage Cap: Eligible expenses are restricted to child care provided for employees earning $80,000 or less (excluding overtime and bonuses). Care for employees earning above this threshold does not qualify for the Alabama credit.
3. First-Come, First-Served Reservation System: You cannot simply claim this credit on your tax return. The state has a hard aggregate cap ($17.5 million for 2026). You must apply to reserve your credit allocation online via My Alabama Taxes at the start of the year. Once the cap is reached, no further credits are issued.
4. Quality STARS Rating Requirement: The child care facility must not only be licensed but must also participate in the Alabama Quality STARS rating program. Contracting with a licensed provider who does not participate in STARS yields $0 in state credits.
Alabama-Specific Example: The "Manufacturing Hub" Scenario
A manufacturing company in Huntsville with 22 employees decides to build a small, on-site child care facility for its workers.
| Expense Category | Annual Investment | Federal 45F Credit (50%) | Alabama State Credit (100%) |
|---|---|---|---|
| Facility Construction & Equipment | $150,000 | $75,000 | $150,000 |
| Operating Costs (1st Year) | $80,000 | $40,000 | $80,000 |
| Total | $230,000 | $115,000 | $230,000 |
🐘 The Alabama Advantage
In this scenario, the small business could claim up to $230,000 in state credits—but only if their Alabama state tax liability is at least $230,000. For a typical small manufacturer with 22 employees, the actual state tax liability may be far lower. The federal 45F credit ($115,000) applies against federal taxes, which is often more usable. Consult a tax professional to calculate your realistic combined benefit.
📊 Realistic Example
If this small business has an Alabama state tax liability of only $20,000, they would save:
- Federal 45F Credit: $115,000 (usable against federal taxes)
- Alabama State Credit: $20,000 (limited by tax liability)
- Total Actual Savings: $135,000 on a $230,000 investment
Alabama Compliance & Resources
📋 Licensing Requirements
All child care facilities must be licensed by the Alabama Department of Human Resources. This ensures that providers meet state standards for health and safety.
AL Department of Human Resources →💼 Alabama Employer Child Care Credit
The new credit (HB358, 2024) is a significant incentive for businesses. Details on claiming the credit will be available through the Alabama Department of Revenue.
AL Department of Revenue →📄 Required Federal Form
File IRS Form 8882 with your federal business tax return to claim the Section 45F credit. Consult with a tax professional for guidance on stacking state and federal credits.
IRS Form 8882 →🤝 Local Support
Connect with local child care resource and referral agencies in Alabama for assistance in finding and partnering with high-quality, licensed child care providers in your area.
Alabama Child Care Resources →Alabama Child Care Landscape
Key economic centers in Alabama where employer-supported child care can have a major impact include: Birmingham, Montgomery, Mobile, Huntsville, Tuscaloosa, Hoover, Dothan, Auburn, Decatur, Madison.
Qualified Intermediary Platforms for 45F
Under the One Big Beautiful Bill Act (OBBBA) 2026 updates, employers can now claim Section 45F credits for expenses paid to qualified intermediary service providers. These platforms help connect employees with licensed child care and manage benefits administration.
Child Care Marketplace Platforms
Technology platforms that connect employees with vetted, licensed child care providers. Expenses for subscription fees, matching services, and provider network access qualify under 45F.
Benefits Administration Services
Third-party administrators that manage employer child care benefits, including enrollment, provider payments, and compliance reporting. Administrative fees are now 45F-eligible.
Resource & Referral Agencies
Community-based organizations that help employees find quality child care. Contracts with R&R agencies qualify for the 10% referral credit component.
Child Care Subsidy Programs
Employer-funded subsidy programs that offset employee child care costs. Direct subsidies to employees for licensed care are fully eligible for the 40-50% credit.
Alabama-Specific Questions
The credit is available to employers who incur expenses for providing child care to employees earning $80,000 or less (excluding overtime and bonuses). The credit rate is 100% for small businesses (≤25 employees) and 75% for larger businesses. The child care provider must be licensed and participate in the Alabama Quality STARS rating program.
Yes, the credits can be stacked. You should consult with a tax professional to ensure you are correctly applying both credits and maximizing your benefits. The Alabama credit is applied against your state tax liability, while the federal credit is applied against your federal tax liability.
Qualifying expenses include costs for on-site facilities (construction, equipment, operating costs), payments to licensed child care providers on behalf of employees, and more. Important: The provider must participate in the Alabama Quality STARS program, and expenses are only eligible for employees earning $80,000 or less.
No. The Alabama Employer Child Care Tax Credit is non-refundable (unless you are a child care provider) and cannot be carried forward to future years. You can only use the credit up to your Alabama state tax liability for that year. Any unused credit is lost.
You must apply to reserve your credit allocation online via My Alabama Taxes at the start of the year. The state has a hard aggregate cap ($17.5 million for 2026), and credits are awarded on a first-come, first-served basis. Once the cap is reached, no further credits are issued regardless of your expenses.
Alabama Quality STARS is the state's Quality Rating and Improvement System (QRIS) for child care providers. To qualify for the Alabama Employer Child Care Tax Credit, the provider you contract with must participate in this program. You can search for STARS-participating providers through the Alabama Department of Human Resources.
The Alabama Department of Human Resources (DHR) maintains a directory of licensed child care providers. You can search for providers in your area on their website or by contacting your local DHR office.
Ready to Calculate Your Alabama Credit Stack?
Use our free, updated 2026 tax calculator to estimate your combined federal and Alabama savings. No personal info required.
Calculate Your Savings