Alabama Employer Tax ‌Credit for Childcare Expenses

Act 2024-303 provides a tax incentive to Alabama​ employers who support their employees’ childcare needs by offering financial⁤ assistance for ‌childcare expenses or establishing and/or operating childcare facilities for their employees with children ⁣five years old or younger. ⁣The Alabama Department of​ Revenue is the administering agency for the employer tax credit.

Provisions of Employer Tax​ Credit

• The tax credit program‌ will be in effect from January 1, 2025, ⁢to December 31, ⁢2027, unless an extension is granted⁤ by the‍ legislature.
• Employers who provide financial assistance for childcare expenses to their employees or establish and/or operate⁣ childcare facilities for their employees are eligible ​to claim this tax credit.
• An employer‌ may claim a tax credit for 75 percent of the eligible childcare expenses incurred by employees, except for small businesses, which⁤ are eligible to‌ claim a credit for 100 ⁣percent of their⁢ eligible expenses. Small businesses are employers that have fewer than 25 employees.
• An employer is ​eligible to receive ⁤a tax credit for qualifying expenses up to $600,000 per year that can be applied against income taxes, state portion⁣ of the Financial institution excise‌ tax, insurance premiums tax, or utility license tax (for​ utility companies only).

Eligibility and Qualifications

• To qualify for the credit, an eligible ‌employer ⁣must reserve a‍ credit allocation through My Alabama Taxes through a first-come, first-served reservation ⁤system.
• Incur eligible expenses for the calendar‌ year in which the reservation is made.
• Demonstrate that they prioritize supporting‍ employees who are eligible for the Earned Income Tax Credit (EITC) under the Internal Revenue⁤ Code.
• Submit required documentation‍ as‍ required by ALDOR.

Credit Reservation

Starting ⁤March 1, 2025, eligible employers can reserve their ⁢credit ‌allocations through⁢ My ​Alabama Taxes. Reservations will ⁣be on a first-come,‍ first-served‌ basis and‍ based on the​ eligibility criteria outlined in the act. Once a ⁤credit is reserved, employers must submit documentation of their qualifying expenses to claim ‍the refund on their tax returns.

Additional Provisions

• ALDOR will award the employer credit ⁣on a first-come,​ first-served basis until the total ⁢annual cap ⁢is reached‍ for all employers. However,‌ at least 25 percent of‍ the total credits will be reserved for employers that are small businesses ‌or⁤ employers headquartered⁤ in rural areas.
• Employers must provide detailed documentation to substantiate their claims, including receipts, contracts with ⁤childcare providers, payroll records, and other relevant information as ​required by ALDOR.
• An employer’s reserved credit will not‌ be awarded⁣ until all required documentation is submitted to and verified by ALDOR.
• The employer tax credit is refundable and ⁤any ⁢unused tax credits may not be​ carried forward to subsequent tax years.
• Pass-through entities ‍eligible for the credit ⁤must distribute the​ refundable credit to ​their owners based on each owner’s pro rata share.

Annual Aggregate⁤ Cap

The tax ‍credit has an annual‍ aggregate cap: $15 million for⁣ 2025, $17.5⁤ million for 2026, and $20 million for​ 2027, of⁤ which 25 percent of each annual‍ cap is ⁤reserved for employers that are small businesses and employers that⁤ are headquartered in⁢ rural areas. Any reserved credits that are not fully allocated‌ by‌ these specific employers by July 1 of each year will be reallocated⁢ to other applicants.