May 21, 2020
The IRS has recently released proposed regulations that clarify how to calculate and account for the federal Historic Tax Credit (HTC) when received over a five-year period.
In 2017, the Tax Cuts and Jobs Act (TCJA) significantly changed several aspects of the HTC. Most notably, the HTC is now claimed over 5 years rather than 1 year, unless the project was grandfathered under the prior tax law. These proposed regulations may be relied upon now for Qualified Rehabilitation Expenditures (QREs) paid or incurred after December 31, 2017. There is a comment period through July 21, after which Treasury will finalize the regulations.
The proposed regulations clarify that the HTC amount is determined in the year the rehabilitation is Placed in Service (PIS) – when the project is ready for its intended use – rather than separate measurements over the recapture period. The HTC amount is then allocated ratably over a 5-year period, 4% each at PIS, and at each anniversary during the 5-year recapture period for a total credit of 20%.
Additionally, the same calculation and ratable allocation of credits (20% per year) are used for the purposes of recapture, basis adjustment, and 50(d) income calculations.
For example, a historic rehab that places in service in 2021 generates $200,000 in QREs. This equates to $40,000 in total federal HTCs, or a ratable share equal to $8,000 each year during the 5-year recapture period, even if the completion date is December 31. For an HTC transaction utilizing a single-tier structure, the basis adjustment, in this case, would be $40,000. For a master lease structure, 50(d) income would be $40,000, which would be amortized over the shortest depreciable life starting in 2021.
HTC Recapture Period
The regulations also make clear that there is only one 5-year recapture period, which begins at the PIS date, not five separate periods. For example, the recapture period for a project that places in service in 2021 will end in 2026, not 5 years after the last credit delivery date.
In the event of a recapture, the IRS has provided guidance on how to calculate the impact of the recapture. Rather than netting against future tax credits, the percentage of the credit to be recaptured is calculated and applied both to credits already taken and to future credits. The key data points for the calculations include:
- Claimed Years: The number of full years between the PIS date and the recapture event.
- Remaining Years: The number of full or partial years remaining in the recapture period at the time of the recapture event.
- Recapture Percentage: The “Remaining Years” divided by the years in the recapture period (5).
- Annual Recapture Amount: The “Recapture Percentage” multiplied by the ratable share of project HTCs.
Using the example above, if the HTC project experiences a recapture event 2 ½ years after the PIS date, there would be two Claimed Years and three Remaining Years, resulting in a Recapture Percentage of 60%. For a project that generated a ratable share of HTCs in the amount of $8,000, this would create an Annual Recapture Amount of $4,800 ($8,000 x 60%). As such, the taxpayer would owe $9,600 for the two Claimed Years and a credit of $3,200 would be claimed in each of the three Remaining Years.
For questions surrounding these proposed regulations, contact NTCIC’s Director of Project Management, Heather Buethe: firstname.lastname@example.org