California Child Care Tax Incentives
Current for 2026 Tax Year • Last Updated: January 24, 2026
Strategic 45F stacking for California employers and Small Business Coalitions
The 2026 California "Stack"
California employers can achieve a "Double Win" by combining the expanded federal Section 45F credit with state-level business incentives.
Claim a tax credit for 40% (Large Business) or 50% (Small Business) of qualified child care expenses, up to $600,000 annually.
Businesses that create jobs and invest in California—including investments in child care infrastructure—can apply for the California Competes Tax Credit (CCTC).
💡 California Strategy
While California does not have a direct "carbon copy" of the federal 45F credit, the California Competes Tax Credit (CCTC) can be used to offset costs not covered by the federal 45F credit. This is especially valuable for businesses making significant child care infrastructure investments.
Note: A specific state bill (SB 533) that would have created a matching 30% state credit failed in 2024. The CCTC remains the primary state-level option.
⚠️ Important Caveats for California Employers
1. "Small Business" Definition Mismatch: The federal Section 45F defines a "small business" (eligible for the 50% rate) as having average annual gross receipts under ~$31 million. However, California Competes typically defines a "small business" as having gross receipts under $2 million. A company with $10M in revenue qualifies as "Small Business" for the federal credit but must compete in the general CCTC pool against large corporations.
2. DCAP Conformity Gap: The OBBBA increased the federal Dependent Care Assistance Program (DCAP) contribution limit to $7,500 for 2026. California may not have passed a conformity bill to match this increase—the state limit may still be $5,000. Employees contributing the full $7,500 could owe California state income tax on the extra $2,500.
3. CCTC is Competitive: The California Competes Tax Credit is not automatic. Applications are only accepted during three specific windows per year, and credits are awarded based on a cost-benefit ratio (tax dollars claimed vs. wages/investments generated). Child care investments without significant new hiring may not score well enough to win an award.
California-Specific Example: The "Tech Hub" Scenario
A technology firm based in San Diego with 400 employees implements a backup care program and a contract for 20 priority slots at a local licensed provider.
| Expense Category | Annual Investment | Federal 45F Credit (40%) |
|---|---|---|
| Contracted Slots | $200,000 | $80,000 |
| Backup Care Program | $50,000 | $20,000 |
| Referral Services | $15,000 | $1,500 (10% rate) |
| Total | $265,000 | $101,500 |
🌴 The California Advantage
By including these child care investments in a California Competes Tax Credit application, the firm can potentially negotiate additional state-level credits. However, success depends on the overall job creation and investment package—child care alone may not score high enough. Combined with workforce retention benefits, this creates a compelling ROI case for California employers.
California Compliance & Resources
📋 Licensing Requirements
All child care facilities must be licensed by the California Department of Social Services (CDSS), Community Care Licensing Division. This applies to both center-based and family child care homes.
CA Community Care Licensing Division →💼 California Competes Tax Credit
The CCTC is administered by the Governor's Office of Business and Economic Development (GO-Biz). Businesses must apply and negotiate credit amounts based on job creation and investment commitments.
GO-Biz: California Competes →📄 Required Federal Form
File IRS Form 8882 with your federal business tax return to claim the Section 45F credit. Consult with a tax professional regarding California's "conformity" to federal tax law changes for the 2026 tax year.
IRS Form 8882 →🤝 Local Support
Employers in California can partner with local Resource & Referral agencies to locate and vet qualified providers. These agencies serve every county in California.
CA Child Care R&R Network →California Child Care Landscape
Why California Employers Are Investing in Child Care
California's high cost of living and competitive labor market make child care benefits a powerful recruitment and retention tool. With the enhanced Section 45F credit now covering up to 50% of costs, California employers can offer meaningful benefits while significantly reducing their net investment.
Employers in these major California metros are leading the way in child care benefits:
- San Diego County – Tech, biotech, and defense employers
- Los Angeles County – Entertainment, healthcare, and professional services
- San Francisco Bay Area – Technology and financial services
- Orange County – Healthcare, tourism, and manufacturing
- Sacramento – Government, healthcare, and education
- San Jose / Silicon Valley – Technology and innovation
- Inland Empire (Riverside/San Bernardino) – Logistics and distribution
- Fresno / Central Valley – Agriculture and food processing
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.
California Section 45F FAQ
Ready to Calculate Your California Savings?
Use our calculator to estimate your federal Section 45F credit. Select "California" in the state dropdown to see state-specific guidance.