Section 40-18-540 through Section 40-18-546, Code of Alabama 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. For questions regarding eligibility and qualifications of the credit, please contact 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 annually.
• 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 twelve.

• 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 Reservation:

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 childcare providers can 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 your return.
• The tax credit has an annual aggregate cap of $5 million for all childcare providers and will be allocated on a first-come, first-served basis.
  •  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 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 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, childcare providers with an approved facility 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.
• Childcare providers receiving a reservation must submit a credit claim through My Alabama Taxes and include the following documentation before a credit will be awarded:
  • A copy of the facility’s quality rating certificate as issued by DHR; and
  • Daily attendance records for each eligible child.
• 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.

Additional Resources

• Act 2024-303
• ALDOR Facility Tax Credit Rules [Pending]
• Map of Targeted Counties