Alabama launches childcare tax credit for employers on March 1, 2025

Employers in Alabama will soon have access to a new tax credit aimed at supporting working families with childcare needs. Beginning March 1, 2025, eligible employers can reserve the Childcare Employer Tax Credit through My Alabama Taxes.

That day will mark the launch of a three-year initiative authorized by the Alabama Legislature in 2024.

The tax credit, administered by the Alabama Department of Revenue, incentivizes businesses to provide financial assistance for employees’ childcare or invest in the operation, maintenance, and improvement of qualified childcare facilities. The program is available annually through December 31, 2027, unless extended by the legislature.

Eligibility and Credit Application

Qualifying employers include for-profit businesses in Alabama that prioritize childcare expenses for employees eligible for the earned income tax credit. Employees must be Alabama residents with wages not exceeding $80,000, excluding overtime and bonuses. Children receiving care must be five years old or younger, and services must be provided by licensed facilities participating in the Alabama Quality STARS rating system or operated by a public higher education institution.

Employers can apply the credit against income taxes, the state portion of the financial institution excise tax, the insurance premiums tax, or the utility license tax (for utility companies only). To be eligible, businesses must first secure a credit reservation before filing a claim with supporting documentation at the end of the tax year.

Credit Calculation and Limitations

Small businesses (fewer than 25 employees) can claim 100% of eligible expenses, up to $600,000 annually.
Larger businesses (25 or more employees) can claim 75% of eligible expenses, also capped at $600,000 annually.

Eligible expenses include construction, renovation, expansion, repairs, equipment purchases, maintenance of childcare facilities, direct payments to childcare facilities for employee childcare, employee reimbursements for childcare, and payments made to reserve childcare services.

Annual Funding Cap and Allocation

The program is subject to an annual funding cap, with a total of $15 million allocated for 2025, increasing to $17.5 million in 2026 and $20 million in 2027. The credit is distributed on a first-come, first-served basis, with 25% of the total funding reserved for small businesses and employers headquartered in rural areas. If these funds remain unreserved by July 1 of each year, they will be reallocated to other eligible businesses.

Next Steps for Employers

Beginning March 1, 2025, interested employers should submit credit reservations via My Alabama Taxes. Reservations alone do not guarantee a credit; employers must provide supporting documentation before final approval. Taxpayers can direct questions about eligibility and application procedures to [email protected].

For more details on the Childcare Employer Tax Credit and the reservation process, businesses are encouraged to visit the Alabama Department of Revenue website.

This initiative is part of Alabama’s ongoing commitment to supporting working families and enhancing access to quality childcare services across the state.

Sherri Blevins is a writer for Mountain Valley News and a staff writer for Yellowhammer News. You may contact her at [email protected].