The Tax Cuts and Jobs Act passed in late 2017 overhauled the tax code and the federal Historic Rehabilitation Tax Credit (“HTC”) was no exception. The most significant change to the HTC was that the credit now needed to be claimed “ratably” over a 5-year period. While the credit has always had a “holding period” of five years in which ownership of the historic building or buildings cannot change, the entire amount of the credit was previously claimed in one year.
This change was initially met with confusion and additional questions from industry experts. The treasury regulations require a taxpayer to reduce its tax basis by an amount equal to the amount of tax credits claimed. If utilizing a “Master Lease” structure pursuant to IRC § 50(d), where the tenant is treated as the owner (and therefore may claim the credits), the tenant has no tax basis in the building and therefore recognizes “50(d) income” equal to the amount of the credits. The main question was whether this basis reduction or 50(d) income would also be taken ratably (at the same percentage as the HTCs) or would continue to take place all in year 1.
In its proposing release earlier this year (in the United States permanent regulatory changes are typically proposed by regulatory agencies to allow for feedback prior to adoption) the IRS indicated that the basis reduction or 50(d) income should continue to take place all in year 1, despite the credits now being claimed ratably. The proposing release also included a rule for calculating the credit and defined “Ratable Share” and “Rehabilitation Credit Determined”. The proposing release also contains examples of how these regulatory changes would be applied.
In the Final Regulations, effective as of September 18, 2020 the IRS effectively adopted the proposing release “as is.” It included clarifications in response to comments it received, specifically:
- The full amount of the basis reduction/50(d) income pickup occurs in year 1, even where the tax credits are taken ratably over 5 years.
- The HTC is not allocated by the partnership, but is calculated at the partner level (subject to partner-level limitations), based on the amount of Qualified Rehabilitation Expenditures (“QREs”) allocated to each partner. QREs are still taken into account by each partner in the tax year the building is placed in service.
The official summary and the entire document can be found in the Federal Register here: https://www.federalregister.gov/documents/2020/09/18/2020-20671/rehabilitation-credit-allocated-over-a-5-year-period
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