Details of Public Law 119-21, section 70401 , One Big Beautiful Bill Act

This provision modifies the employer-provided child care credit by increasing the percentage of qualified child care expenditures eligible for the credit from 25 percent to 40 percent. For eligible small businesses, the percentage of qualified child care expenditures is increased to 50 percent.

The provision increases the maximum credit amount to $500,000 and in the case of an eligible small business, the limit is increased to $600,000; these limits would be adjusted for inflation annually for taxable years beginning after 2026. Beginning after 2026, the credit amounts of $500,000 and $600,000, would be adjusted using a cost-of-living calculation.

This provision expands the definition of “eligible small business” to include a business that meets the gross receipts test under IRC section 448(c), meaning that the average annual gross receipts for the partnership or corporation do not exceed $25,000,000, adjusted for inflation after 2018. The adjusted amount for 2025 was $31,000,000. This provision, for purposes of this credit, modifies the gross receipts test to include the previous five-taxable-year period, instead of three taxable year.

This provision expands qualified child care expenditures allowed under a contract with a qualified child care facility to also include contracts with an intermediate entity that contracts with one or more qualified child care facilities to provide child care services. Additionally, this provision expands eligible child care facilities to include facilities that are jointly owned or operated. The Secretary of the Treasury is required to issue regulations or other guidance that may be necessary to carry out these two amendments to the credit.

California does not conform to the employer-provided child care credit.