Our monthly Affordable Housing News and Views (AHNV) newsletter tends to focus on the Low-Income Housing Tax Credit (LIHTC), but there are other federal tax credits with similar roles in financing development, such as the Rehabilitation Credit, aka the Historic Tax Credit (HTC). This month, we take a break from all things LIHTC to dive into the HTC via a resource you might not have heard about: The IRS’s Rehabilitation Credit (Historic Preservation) FAQs.
The IRS issued this Frequently Asked Questions page for the Rehabilitation Credit (HTC) back in June 2021. A few Questions and Answers have been added since then, and this section of IRS.gov continues to be a great resource for those who are new to this tax credit program. Digging into more detail, it also contains technical cites for the more experienced tax credit professional.
We want to highlight a few areas of interest, and remind you that we have hundreds of Affordable Housing professionals available to help with all your tax credit accounting and advisory needs.
Let’s start at the top of the list, in the Eligibility and Definitions section, with Q1: Who can claim a rehabilitation credit? Like many sections of the FAQ, the answer to this question is very detailed, and also contains links to supporting information. This includes the General Business Credit page (the HTC is one such credit), which will take you to IRS Form 3468, “Investment Credit.” Yes, IRS forms can be boring, but, along with their instructions, these forms contain numerous reminders, clarifying explanations, and the supporting code sections for key aspects of the credits. It is amazing how much is clarified in just one IRS form. Even a brief skim of the instructions to IRS Form 3468 will provide a framework for how the HTC works and why it has become a viable source of capital for development projects.
Jumping down to Q7: What is the effect of the Tax Cuts and Jobs Act (TCJA) on the rehabilitation credit? It has been over five years since the TCJA changed the HTC from a tax credit claimed in one year to claiming over five years. The TCJA also included a transition period for the phase-out of projects that qualify under the old One-Year Tax Credit method. The Transition Rules focus on ownership of the building and the substantial rehabilitation test. The end of that phase-out period is now in sight: 2023 will be the last year of the One-Year Credit approach, as the Transition Rules do not allow substantial rehabilitation tests to end any later than June 20, 2023. It is important to note that any One-Year Tax Credit eligible projects would need to also use the 60-month period for the substantial rehabilitation test. Q7 also references Notice 2020-58, related to COVID-19 construction delays, which could impact timing of the test. A lot of information is packed into Q7, which also includes additional National Park Service information, as well as important Regulation sections.
A more recent FAQ update has been provided in the form of Q11: What conditions must be met to substitute a 60-month measuring period for a 24-month measuring period? The two criteria required for the use of the 60-month measuring period for the substantial rehabilitation test are fairly straightforward: BEFORE IT BEGINS, the rehabilitation must be reasonably expected to be completed in two or more distinct phases, which must be described in written architectural plans and specifications. Sounds simple, but fact patterns can get complicated quickly when it comes to the substantial rehabilitation test, so please plan your project with this in mind.
There are four questions in the Qualified Rehabilitation Expenditures (QREs) section. I find Q4 to be the most interesting: What are some examples of expenses that are not qualified rehabilitation expenditures? Yes, the list is rather short. However, just below this question, there is a link to a Topical Tax Brief all about QREs. As mentioned, the FAQ has numerous links to supporting information like this brief. While it is almost impossible to be comprehensive about what is and what isn’t a QRE, this document is a useful resource for any unique aspects of the rehabilitation process for historic buildings that may qualify for the HTC.
My favorite question is in the Buying and Selling Credits section, because I am asked this same question all the time. Q1: Can the rehabilitation credit be bought and sold? The answer here is absolutely NO. But please keep reading, because it gets interesting starting with the first bullet in that answer: “Taxpayers can invest in a rehabilitation and validly claim the credit.” So, you are telling me there is a chance? Yes, I am, there is a way to monetize an investment tax credit. And that is really the main point about highlighting just a few of the concepts raised by the FAQ: Like many aspects of the code and regs, it can send you down a rabbit hole of technical, complex partnership tax concepts that serve as the foundation of this unique source of financing. It can be a little daunting when you try to digest IRS resources – even those written in layman’s style. We want to remind you that CohnReznick professionals love the technical, the complicated, the unique situations, and even the daunting.
We will continue to highlight other tax credit resources in future AHNV issues, so make sure you’re subscribed to receive them right in your inbox.
Questions? Working on a historic building? Always feel free to contact our team. We can help.
Affordable Housing News & Views