COVID-19 has drastically impacted every facet of our lives, including tax preparation, filings, and deadlines. Recognizing these effects, the federal government issued an emergency declaration providing relief from tax deadlines for Americans adversely effected by the COVID-19 emergency. The IRS recently issued Notice 2020-58 (the “Notice”), which provides details on how this relief will be applied to transactions taxpayers claiming Historic Tax Credits (“HTCs”) under section 47 of the Internal Revenue Code. Click here for a copy of the Notice.
The Notice highlights two specific, technical changes to the rules governing HTCs:
- Substantial Rehabilitation Test – In order for a building to be eligible for HTCs, it must be “substantially rehabilitated” rather than merely repaired or improved. The threshold for substantial rehabilitation requires the owner of the building to incur qualified rehabilitation costs in excess of its tax basis in the building over a 24-month period (60 months for a “phased” project). The owner’s tax basis is initially the acquisition price of the building, subsequently adjusted upward for investments in improvements and downwards for depreciation. The treasury regulations permit the taxpayer claiming the credit to include QREs incurred before the measuring period begins and any QREs incurred up until the end of the year in which the 24-month (or 60-month) measuring period ends, so long as the basis is exceeded during the measuring period. For example, if a 24-month (or 60 month) measuring period were to end in June of 2021, QREs incurred through December 2021 can generate HTCs.
The Notice extends the time deadline by which a building owner must exceed its basis for the purposes of the substantial rehabilitation test. If the 24-month (or 60-month) period ends on or after April 1, 2020 and before March 31, 2021, the last day of the measuring period is postponed until March 31, 2021.
- TCJA Transition Rule –The Tax Cuts and Jobs Act, passed in December of 2017, drastically overhauled the Internal Revenue Code, including the provisions pertaining to HTCs. The HTC was changed from a “1 year credit” meaning the entire amount could be claimed the year the building was placed in service, to a “5 year credit” meaning the credit is claimed ratably, at 20% of the total per year over the 5 year period. Additionally, a smaller HTC equal to 10% of qualified costs for certain buildings, was eliminated. The Tax Cuts and Jobs Act included a “transition rule,” which stated that any project claiming a 1 year credit or earning the 10% credit, would need to: (A) be owned or leased by the taxpayer claiming HTCs on or before December 31, 2017; and (B) begin its substantial rehabilitation testing period before 20, 2018. So under the transition rule, the last day a 24-month measuring period could have expired is June 20, 2020.
The Notice extends the period in which the owner can rely on the transition rule (including eligible expenses in the Substantial Rehabilitation Test calculation) through March 31, 2021.
On or before December 1, 2017, Owner purchases an office building, which is already listed on the National Register of Historic Places. Owner received a Part 2 Historic Preservation Certification Application (“HPCA”) approval to rehabilitate the building, and intends on claiming the credits all in 1 year under the transition rule. Owner starts construction on April 30, 2018 and uses that date as the start of the 24-month measuring period. Due to Covid-19, the Owner was forced to shut down construction, and does not resume until June 2020. As a result, Owner will not exceed its tax basis in the building before the end of the 24-month measuring period, and no longer qualifies under the transition rule.
However, the Notice extends the Owner’s measuring period until March 31, 2021. Assuming the Owner passes the substantial rehab test (exceeds its basis) by March 31, 2021, and places the building in service in 2021, the project qualifies for the 1 year credit under the transition rule. QREs incurred through the end of 2021 will generate HTCs for Owner.
Assume same facts and dates as Example 1 above, except the building is not listed on the National Register, nor is it within a Registered Historic District listed on the National Register of Historic Places. As such, Owner does not submit a Part 2 HPCA application for the rehabilitation. Owner plans on substantially rehabilitating the building and will not change any of the walls or internal structural framework of the building.
Assuming the Owner passes the substantial rehab test before March 31, 2021, and places the building in service in 2021, the project qualifies for the project will qualify for the 10% credit which can be claimed in 1 year.
By: Rich Rogers & Phil Borrelli
This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors regarding your specific situation.
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