Alabama Childcare Tax Credits (2025–2027) – Opportunities for Employers and Childcare Providers

Alabama enacted tax incentives beginning in 2025 to expand childcare capacity and support workforce participation. The program includes (1) an Employer Child Care Tax Credit, and (2) a Child Care Facility Tax Credit for qualifying providers.

 Credits are awarded first-come, first-served, and subject to annual statewide program caps. For tax year 2026, reservations opened January 5, 2026, through the My Alabama Taxes (MAT) portal.

1) Employer Childcare Tax Credit

This tax credit applies to for-profit employers operating in Alabama that incur eligible childcare support costs for employees. Eligible costs include, but are not limited to, employer payments made directly to a licensed childcare facility on an employee’s behalf or stipends paid to an employee to offset their childcare expenses. Employee/child eligibility requirements apply.

Credit reservations and credit claims must be submitted through the My Alabama Taxes account of the taxpayer that will utilize the credit. Tax credit reservations alone do not guarantee that the credit will be awarded.

How much is the credit?

• Small businesses (<25 employees): Eligible for a credit equal to 100% of eligible expenses, with a maximum of $600,000 per year.
• Other employers (25+ employees): Eligible for a credit equal to 75% of eligible expenses, with a maximum of $600,000 per year.

The Employer Tax Credit is non-refundable for all employers except qualifying childcare providers. Only those childcare providers who meet the eligibility criteria for the employer credit can receive a refund if the credit amount exceeds their tax liability.

Statewide annual program caps:

• $15M (2025), $17.5M (2026), $20M (2027)
• 25% set-aside for small businesses or employers headquartered in targeted rural counties

2) Childcare Facility Tax Credit

This credit applies to for-profit childcare providers operating a qualifying facility. Credit is based on eligible subsidy children and the facility’s Quality STARS rating. An ‘eligible subsidy child’ is a child enrolled in the facility for whom childcare is paid for or subsidized by the Alabama Department of Human Resources.

Credit reservations and credit claims must be submitted through the My Alabama Taxes account of the taxpayer that will utilize the credit. Tax credit reservations alone do not guarantee that the credit will be awarded.

How much is the credit?

The credit is calculated as the average monthly number of eligible subsidy children multiplied by the facility’s Quality STARS rating amount:

• 5-star: $2,000/child
• 4-star: $1,750/child
• 3-star: $1,500/child
• 2-star: $1,250/child
• 1-star: $1,000/child

The credit is capped at $25,000 per qualifying facility per year. The Facility Tax Credit is refundable, but any unused credit cannot be carried forward to subsequent tax years.

Statewide annual program cap:

• $5M per year, with 25% set-aside for facilities operating exclusively in targeted rural counties.

These credits are limited and time sensitive. Please contact a BMSS Tax Advisor to discuss your specific situation and determine if you are eligible to benefit from these programs.