Exempt Orgs Revisit Credits Amid UBTI Shifts

The environment for unrelated business taxable income (UBTI) has shifted significantly due to the IRC Section 512(a)(6) “silo” rules and the exhaustion of pre-2018 net operating loss (NOL) carryforwards. Tax-exempt organizations should not dismiss tax credits simply because they currently are generating little or no taxable unrelated business income or earning credits from activities other than those producing unrelated business income. In many cases, credit opportunities can arise from enterprisewide activities and may be carried forward to offset future tax liabilities.

Background

The Tax Cuts and Jobs Act of 2017 added IRC Section 512(a)(6), which requires exempt organizations to separately compute UBTI for each unrelated trade or business, limiting the ability to use losses from one activity to offset income from another. At the same time, many organizations that historically relied on pre-2018 NOL carryforwards are exhausting those attributes and might begin generating UBTI. As a result, organizations that previously paid little or no federal income tax could now have increased UBTI exposure.

Key developments and planning points

A tax credit review should begin with an assessment of the organization's overall UBTI profile. The scope includes evaluating revenue streams, unrelated business activities, expense allocations, available NOLs, and existing carryforwards to understand the organization’s current and projected tax position. Establishing this broader context enables organizations to identify where available tax credits and deductions could most effectively reduce current or future UBTI liabilities and support a more strategic approach to tax planning.

Organizations also should review Schedule K-1, “Partner’s Share of Current Year Income, Deductions, Credits, and Other Items,” for credits allocated through partnership investments.

Crowe observation

Credits for research, low-income housing, investment, fuel, renewable electricity, and clean energy often are overlooked when Schedule K-1 reviews focus primarily on UBTI, state filing requirements, foreign reporting, and investment income.

Following is a noninclusive list of credits an organization might consider as part of its review.

Energy credits

Many clean energy provisions are being phased out or eliminated under the One Big Beautiful Bill Act, particularly those related to electric vehicles, charging infrastructure, renewable energy, and energy efficiency projects. Depending on applicable transition rules, organizations still could have opportunities to invest in qualifying projects such as wind, solar, energy storage, and other clean electricity generation before certain incentives phase out.

The Section 48E clean electricity investment credit is a technology-neutral tax incentive that generally provides a 30% investment tax credit for qualifying projects that satisfy applicable prevailing wage and apprenticeship requirements, with additional bonus credit amounts available in certain circumstances.

The clean electricity production tax credit under Section 45Y is available for qualified facilities generating clean electricity that are placed in service after Dec. 31, 2024.

Employer-related credits

The following employer-related credits might provide valuable tax relief:

• Section 45B provides a credit for the employer’s share of Federal Insurance Contributions Act taxes paid on employee cash tips in excess of those treated as wages for minimum wage purposes, making the credit particularly relevant for not-for-profits operating restaurants, cafeterias, or similar facilities.
• Section 45E provides a credit to encourage small employers to establish retirement plans by helping offset qualified startup costs. Enhanced benefits under recent legislation make the credit especially valuable for smaller not-for-profit employers seeking to expand employee retirement benefits.
• Section 45F provides a recently expanded childcare credit.
• Section 45R provides a credit to eligible small employers, including tax-exempt organizations, that contribute toward employees’ health insurance premiums through a Small Business Health Options Program plan. For tax-exempt employers, the credit generally is limited to 35% of qualifying premium contributions and remains subject to employee count and average wage thresholds.
• Section 45S provides a general business credit for eligible employers that maintain a written paid family and medical leave policy that meets statutory requirements. The credit generally equals 12.5% to 25% of qualifying wages paid for up to 12 weeks of leave per employee. Beginning in 2026, the credit is made permanent.

Other business credits

Beyond energy incentives, organizations should evaluate whether their operations qualify for other federal business tax credits. For example, Section 34 provides a credit for certain qualifying fuel tax payments, while Section 41 provides a research credit for qualified research activities conducted in connection with a trade or business.

Looking ahead

As tax-exempt organizations continue to navigate an evolving tax landscape, proactive planning remains essential. While an organization's primary focus is advancing its exempt mission, thoughtful management of unrelated business income can help minimize unexpected tax liabilities, maximize available incentives, and preserve cash flow for mission-driven activities. Evaluating available federal tax credits and incentives as part of an overall UBTI strategy could provide opportunities to offset tax liabilities resulting from unrelated business activities while supporting investments that align with operational objectives.