Section 40-18-540 through Section 40-18-546, Code of Ala. 1975
Section 40-18-541 provides a tax incentive for Alabama childcare providers who own and operate a qualified childcare facility. The incentive is based on the facility’s quality rating and average monthly number of eligible children.
The Alabama Department of Revenue is the administering agency for the facility tax credit. If you have questions about eligibility and qualifications, email incentives@revenue.alabama.gov.
Provisions of the Facility Tax Credit Include:
- The credit is available to qualifying childcare providers each year beginning January 1, 2025, until December 31, 2027, unless extended by legislature.
- The credit may be applied against:
- Income taxes;
- State portion of the financial institution excise tax;
- Insurance premiums tax; or
- Utility license tax (For utility companies only).
- A childcare provider in Alabama that owns and operates a childcare facility may be eligible to claim a facility tax credit of up to $25,000 per year based on:
- The average monthly number of eligible children enrolled and
- The facility’s quality rating under the Alabama Quality STARS program.
- The Quality Rating and Improvement System, known as Alabama Quality STARS program, measures the quality of childcare facilities on a scale of one to five stars.
- Qualifying childcare facilities must:
- Be an eligible for-profit entity,
- Be licensed by the Alabama Department of Human Resources (DHR), and
- Participate in the quality rating and improvement system.
- Eligible children must:
- Be five years of age or younger and
- Participate in the Childcare Subsidy Program.
Credit Calculation:
- A childcare provider’s annual credit amount is calculated by multiplying the average monthly number of eligible children by the applicable STAR rating amount, with a maximum of $25,000 per qualifying childcare facility.
- The average monthly number of eligible children should be calculated as follows:
- Step 1: The average number of eligible children for each month must be calculated by adding the average number of eligible children for each day of the month and dividing by the total number of days in the month.
- Step 2: Add the average number of eligible children for each month of the year and divide by 12.
- Incentive amounts per quality rating are as follows:
- Five-star rating: $2,000 per child.
- Four-star rating: $1,750 per child.
- Three-star rating: $1,500 per child.
- Two-star rating: $1,250 per child.
- One-star rating: $1,000 per child.
Credit Award Process:
- To receive the credit, eligible taxpayers must first secure a credit reservation through My Alabama Taxes. Tax credit reservations alone do not guarantee that the credit will be awarded.
- At the close of the tax year, taxpayers who received a credit reservation must submit a credit claim in My Alabama Taxes substantiating their reservation in order to be awarded the credit. Only taxpayers who have secured a credit reservation will be eligible to submit a credit claim.
- Credit claims will be reviewed and approved by ALDOR. A credit cannot be utilized on a tax return until it has been approved by ALDOR.
Note! Credit reservations and credit claims must be submitted through the My Alabama Taxes account of the taxpayer that will utilize the credit. If you need assistance creating a My Alabama Taxes account or are unsure which account the credit will be applied to, email incentives@revenue.alabama.gov.
Credit Reservations:
- Starting January 5, 2026, eligible childcare providers may make credit reservations through My Alabama Taxes for tax year 2026. Reservations will be awarded on a first-come, first-served basis and in accordance with the eligibility criteria outlined in the Act 2024-303.
- The tax credit has an annual aggregate cap of $5 million for all childcare providers.
- 25 percent of the annual cap is reserved for childcare facilities operating exclusively in rural areas. Rural Areas are counties meeting the definition of “targeted counties” under §40-18-376.1(a)(2), Code of Ala. 1975. A map of targeted counties can be found here.
- A queue will be established once 75 percent of the annual cap is allocated to non-rural childcare providers. If the dedicated 25 percent of funds are not fully reserved by July 1 of each year, any remaining funds will be allocated on a first-come, first-served basis to those in the queue.
- Detailed procedures on how to make a reservation can be found here.
Claiming the Facility Tax Credit:
- After the close of the tax year, but no later than March 1, taxpayers with an approved facility credit reservation must submit a credit claim through My Alabama Taxes and include detailed documentation to substantiate their claims.
- The credit will only be awarded after all required documentation is submitted and verified by ALDOR. Taxpayers will receive a web notice when their credit claim has been reviewed.
- Once a credit has been awarded, the applicable tax return should be filed and the credit claimed on the appropriate schedule (BC, PC, OC, etc.) of the return.
- The tax credit shall be claimed in the tax year during which the childcare facility’s quality rating is in effect and eligible children are enrolled.
- The tax credit is refundable but may not be carried forward to subsequent years.
- The tax credit may be passed to the owner of a pass-through entity based on their pro rata share but cannot otherwise be transferred to any other taxpayer.
- Detailed procedures on how to make a credit claim can be found here.
Supporting Documentation:
- All facility credit claims must be accompanied by documentation supporting the requested credit. This should include:
- A copy of the facility’s quality rating certificate as issued by DHR;
- Daily attendance records for each eligible child; and
- Facility Credit Calculation Spreadsheet, available under Additional Resources below.