Section 40-18-540 through Section 40-18-546, Code of Alabama 1975
Section 40-18-541 provides a tax incentive to Alabama employers who support their employees’ childcare needs by offering financial assistance for the provision of childcare or for employers who incur eligible expenses for the operation, maintenance, and/or updates of a qualified childcare facility.
The Alabama Department of Revenue is the administering agency for the employer tax credit. For questions regarding eligibility and qualifications of the credit, please contact incentives@revenue.alabama.gov.
Provisions of the Employer Tax Credit Include:
- The credit is available to qualifying employers 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).
- The credit is equal to a percentage of eligible expenses incurred by an employer to support the provision of childcare services at childcare facilities for employees’ children.
- Eligible employers include for-profit businesses operating in Alabama who can demonstrate that they prioritize the payment of eligible expenses for employees who qualify for the earned income tax credit.
- A small business is an employer with fewer than 25 employees.
- Qualifying children are children five years of age or less.
- Employees include individuals who:
- Are a resident of Alabama;
- Are employed by an employer on a full or part-time basis, including independent contractors; and
- Have wages no greater than $80,000, excluding overtime and bonuses.
- Qualifying childcare facilities include:
- Facilities licensed by the Alabama Department of Human Resources (DHR) and participating in the quality rating and improvement system (Alabama Quality STARS).
- Facilities operated, directly or indirectly, by a Public Institution of Higher Education.
- A childcare facility’s standing with DHR can be verified here.
- Eligible expenses are expenses incurred by an employer for the following:
- Amounts incurred for the construction, renovation, expansion, repair, purchase of equipment, and/or maintenance and operation of a childcare facility.
- Direct payments made by an employer to a childcare facility to cover childcare expenses for the children of employees.
- Reimbursements to employees for childcare expenses at approved facilities for children of employees.
- Payments made to childcare facilities to reserve services for children of employees.
Credit Calculation:
The Employer Tax Credit is calculated as a percentage of eligible childcare expenses incurred by the employer during the tax year, subject to the following:
- Small Businesses (fewer than 25 employees): Eligible for a credit equal to 100 percent of eligible expenses, with a maximum of $600,000 annually.
- Other Employers (25 or more employees): Eligible for a credit equal to 75 percent of eligible expenses, with a maximum of $600,000 annually.
Credit Reservations:
To receive a credit, eligible taxpayers must first secure a credit reservation through My Alabama Taxes. At the close of the tax year, taxpayers who received a credit reservation must submit a credit claim substantiating their reservation in order to be awarded a credit. Only taxpayers who received a credit reservation will be eligible to submit a credit claim.
- Starting March 1, 2025, eligible employers may make credit reservations through My Alabama Taxes. Reservations will be awarded on a first-come, first-served basis, and in accordance with the eligibility criteria outlined in the Act.
- Please be advised, tax credit reservations alone do not guarantee that the credit will be awarded. Once a credit is reserved, supporting documentation must be submitted to the Department for review. When approved, 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 has an annual aggregate cap of $15 million for 2025, $17.5 million for 2026, and $20 million for 2027, and will be allocated on a first-come, first-served basis.
- 25 percent of the annual cap is reserved for employers qualifying as a small business or for employers that are headquartered in rural areas. Rural areas are counties meeting the definition of “targeted counties” under Section 40-18-376.1 (a)(2). A map of targeted counties can be found here.
- A queue will be established once 75 percent of the annual cap is allocated to employers who are neither small businesses nor headquartered in rural areas. 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 Employer Tax Credit:
- After the close of the tax year, but no later than March 1, taxpayers with an approved employer credit reservation must submit a credit claim through My Alabama Taxes and include detailed documentation to substantiate their claims. The reserved credit will only be awarded after all required documentation is submitted and verified by ALDOR.
- The tax credit shall be claimed in the tax year during which eligible expenses are incurred by an employer.
- 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.
- The tax credit may be passed to the owners of a pass-through entity based on their pro rata share but cannot otherwise be transferred to any other taxpayer.