My husband and I were lucky as parents. In 2005, I brought our young daughter to work right after maternity leave, and she was my officemate until she could crawl into the hallway. A colleague did the same with her son the following year. Our employer, a small business with fewer than 25 employees, was willing to make these special arrangements. However, it could not offer formal child care services, nor did it take advantage of the employer-provided child care allowance (known as a 45F, after the section in the Internal Revenue Code).

This tax credit, passed by Congress in 2001, allows employers to offset the costs of establishing and maintaining a child care facility. The 45F credit generally provides a greater benefit to businesses than simply deducting child care expenses, which businesses can also take. Recently, Senators Tim Kaine (D-VA) and Katie Britt (R-AL) introduced the Child Care Affordability and Availability Act, which aims to expand 45F alongside other child care benefits.

The bill would increase the maximum 45F credit from $150,000 to $500,000 while also covering 50 percent of qualified child care expenses instead of the current 25 percent. For small businesses, the bill provides a maximum credit of $600,000 to encourage joint applications for those who want to pool their resources.

On paper, expanding 45F sounds like a win-win, increasing the supply of child care, reducing costs, and making it easier for parents to stay in the workforce. But take-up of the current incentive is minimal. The Government Accountability Office (GAO) reported that in 2016, of the roughly 70,000 corporate tax returns filed for general business credits, only a few hundred claimed child care credits totaling less than $20 million.

So far, 45F is not popular with companies

Larger companies are more likely to offer on-site child care, but even then, uptake is low. According to the 2023 Best Place for Working Parents National Trends Report, only 11 percent of companies surveyed offered on-site child care. For companies with more than 1,000 employees, that rate rises slightly to 16 percent. In contrast, 90 percent of companies in the education sector offered such facilities.

With that comes regulatory challenges. Setting up on-site child care requires navigating complex state and federal regulations. This process can be overwhelming, especially for small businesses without dedicated resources. These regulatory hurdles can deter employers from setting up on-site child care, let alone taking advantage of the credit.

The 45F credit is also non-refundable, meaning businesses must have a tax liability large enough to be offset by the credit. Small businesses with thin profit margins therefore benefit less from it. And while businesses can carry over the unused credit to future tax years, this option does not provide immediate relief.

Even the 45F credit cannot necessarily overcome consumer preferences. Not all workers prefer on-site or facility-based child care. According to the U.S. Census Bureau’s Household Pulse Survey conducted from September to December 2022, only 8.4 percent of respondents used a daycare center, while 21.8 percent relied on relatives for child care. The desire for flexibility and convenience often leads parents to look for alternatives outside of the workplace.

Is an extension of 45F the best solution?

While Kaine and Britt’s proposal offers greater financial incentives and makes it easier for small businesses to apply jointly, increasing the credit value cannot change child care regulations, nor can it change parents’ desire for more diverse and affordable child care options.

Child care, especially daycare, is expensive. According to the National Database of Child Care Prices, the average cost of child care in 2018 ranged from $4,810 ($5,357 in 2022) to $15,417 ($17,171 in 2022), depending on the type of provider, the child’s age, and the county’s population. This represents between 8 and 19.3 percent of the median family income.

And relying on employers for child care may not be the best solution for all families. Some say it shouldn’t be that way. Elliot Haspel argues in his 2024 report for the New America Foundation, “Employers are not a core, sustainable solution to the child care problem… Public or social goods are simply not delivered through the employer-employee relationship.”

While Kaine and Britt’s proposal aims to encourage and reward businesses to offer on-site child care, increasing the supply of child care may require solutions beyond tax law.

Policymakers could consider broader strategies, such as expanding public investment in childcare infrastructure that supports diverse care models. This could create more sustainable and accessible childcare for all, regardless of their occupation.

The tax dogis published once a month and helps understand tax policy for those not in the tax world by linking tax issues to everyday concerns. Do you have a question or an idea? Send Renu an email.