Exempt Orgs Revisit Expanded Childcare Credit

The One Big Beautiful Bill Act (OBBBA) expanded the Section 45F employer-provided childcare credit beginning in 2026. The changes increase the credit percentage on qualifying expenditures, raise the annual credit limitation, and expand certain qualifying arrangements. The expanded credit could help exempt organizations that, several years after the enactment of the Tax Cuts and Jobs Act of 2017, are seeing increased tax bills from UBTI due to limits on the use of pre-2018 net operating losses (NOLs) and the siloing rules under Section 512(a)(6). Section 45F might warrant renewed attention if an organization operates, subsidizes, or contracts for employee childcare, even if the childcare activity itself does not generate UBTI.

Background

Section 45F long has provided a general business credit for a portion of an employer’s qualified childcare facility costs and qualified childcare resource and referral costs. Before the 2026 expansion, the credit generally equaled 25% of qualified childcare expenditures plus 10% of qualified childcare resource and referral expenditures, subject to a $150,000 annual cap. The credit is part of the general business credit under Section 38 and generally is nonrefundable.

For amounts paid or incurred after Dec. 31, 2025, Section 45F increases the credit for qualified childcare expenditures to 40%, or 50% in the case of an eligible small business. The 10% credit for qualified childcare resource and referral expenditures remains unchanged. The annual cap increases to $500,000, or $600,000 for an eligible small business.

Relevance for exempt organizations

For exempt organizations, Section 45F often was not a priority under prior law because the credit was capped at a relatively low amount, the qualification rules could be operationally demanding, and the benefit depended on having tax liability against which the credit could be used. However, because of increasing UBTI as a result of NOL limits and Section 512(a)(6) siloing rules, exempt organizations should look more closely at whether general business credits, including the employer-provided childcare credit, could offset an increased tax liability associated with increased UBTI.

Because UBTI must be computed separately for each unrelated trade or business, losses from one silo generally cannot offset income from another silo. For exempt organizations with profitable unrelated activities, that means remaining pre-2018 NOLs are absorbed more quickly in income-producing silos, while losses in other silos provide little or no relief. As the pre-2018 NOLs are reduced, organizations that once had limited tax exposure are finding themselves in a taxpaying position, in some cases for the first time, and looking more closely at credits as a viable strategy to reduce tax.

Credit qualifications

The qualified childcare credit is relevant for organizations that pay or incur amounts for any of the following:

• To acquire, construct, rehabilitate, or expand depreciable property used as part of a qualified childcare facility
• To operate a qualified childcare facility
• Under a contract with a qualified childcare facility to provide childcare services to employees

A qualified childcare facility generally must have childcare assistance as its principal use and must satisfy applicable state and local law, including licensing requirements. Enrollment must be open to employees of the taxpayer, and the use of the facility or eligibility to use it must not discriminate in favor of highly compensated employees as defined under Section 414(q). If the facility is the principal trade or business of the taxpayer, at least 30% of the enrollees generally must be dependents of employees.

The OBBBA amendments also broaden the types of arrangements that can qualify. The statute now expressly includes amounts paid under a contract with an intermediate entity that contracts with one or more qualified childcare facilities to provide childcare services to employees. It also provides that a facility does not fail to qualify merely because it is jointly owned or operated by the taxpayer and other persons. For exempt organizations, those changes could matter when direct ownership or operation of a facility is not practical, but a shared arrangement or outsourced structure is feasible.

Crowe observation

Exempt organizations should evaluate whether existing employer-provided childcare arrangements can qualify for the credit as part of a broader strategy to manage UBTI-related cash tax.

Looking ahead

Exempt organizations with UBTI should begin reviewing existing and planned employer-provided childcare arrangements now so that 2026 budgeting, contracting, and operational decisions take the expanded Section 45F credit into account. That review should include identifying potentially qualifying capital expenditures, operating costs, and third-party childcare arrangements, including any intermediary structure that might now fall within the amended statute.

Tax departments should work with their tax adviser to model the revised credit against projected UBTI and expected general business credit utilization, particularly when profitable silos are using up remaining pre-2018 NOLs or silos are generating losses that provide limited relief for silos generating UBTI because of Section 512(a)(6).