Why don't we qualify for the Dependent Care Credit if we paid childcare expenses and worked all year? I have a W-2 and my wife is self-employed with a net loss this year

[tamberino]

If my wife's business is operating at a net loss does that mean she doesn't meet the earned income requirement?

[xmasbaby0]

If your spouse was self-employed and shows a loss, that is why you do not qualify for the childcare credit.   You must be able to show income earned by both spouses---and that would have to include a profit made from her self-employment---not a loss.

[CatinaT1]

You can qualify for the credit, but it is a calculation that TurboTax does not support.

Publication 503 (2022), Child and Dependent Care Expenses, states you can use an Optional method if earnings are low or a net loss.

If your net earnings from self-employment are low or you have a net loss, you may be able to figure your net earnings by using an optional method instead of the regular method. See Pub. 334, Tax Guide for Small Business, for details. If you use an optional method to figure net earnings for self-employment tax purposes, include those net earnings in your earned income for this credit. In this case, subtract any deduction you claimed on Schedule 1 (Form 1040), line 15, from the total of the amounts on Schedule SE, lines 3 and 4b, to figure your net earnings.

[Critter-3 · Accepted solution]

From the pub 334:

https://www.irs.gov/pub/irs-pdf/p334.pdf

Why use an optional method?

You may want to use the optional methods (discussed later) when you have a
loss or a small net profit and any one of the following applies.
• You want to receive credit for social security benefit
coverage.
• You incurred child or dependent care expenses for
which you could claim a credit. (An optional method
may increase your earned income, which could increase your credit.)
• You are entitled to the earned income credit. (An optional method may increase your earned income,
which could increase your credit.)
Chapter 10 Self-Employment (SE) Tax Page 41
• You are entitled to the additional child tax credit. (An
optional method may increase your earned income,
which could increase your credit.)

Effects of using an optional method. 

Using an optional method could increase your SE tax. Paying more SE tax
could result in your getting higher benefits when you retire.

Using the optional methods may also decrease your AGI due to the deduction for one-half of SE tax on Form
1040 or 1040-SR, which may affect your eligibility for credits, deductions, or other items that are subject to an
AGI limit. Figure your AGI with and without using the optional methods to see if the optional methods will benefit you.

If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method.

The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual
earnings in gross income, regardless of which method you use to determine SE tax.

And the program does handle this ... it is just not put front and center and it can only be used 5 times per person :  

[tamberino]

Thank you! But it looks like you can’t take this option if you are a new business, which is the situation for my wife (this is her first year being self-employed). It says you have to have made at least $400 from self-employment in the two years prior.

It’s pretty normal for a new business to operate at a loss the first year, and it sure takes a lot of time and work. Not sure the rationale for denying this credit.