Using Tax Credits to Maximum Benefit for Your Construction Project
Developers have discovered the benefit of identifying early on if their projects are eligible to participate in tax incentive programs. The Federal Preservation Tax Incentives program alone has certified the rehabilitation of over 38,000 historic buildings, with investments totaling over $66 Billion for the rehabilitation of these historic properties. Following are some highlights of the federal and state historic rehabilitation tax incentive programs and the new market tax credit (NMTC) program.
Federal and State Preservation/Rehabilitation Tax Credits programs are designed to encourage developers to rehabilitate historic structures, a choice that without incentives would often prove more expensive than new construction.
The Federal Preservation Tax Incentives program provides a 20% federal income tax credit for the rehabilitation of certain historic, income-producing buildings. In order to qualify for the federal credits, the property must be listed on the National Register of Historic Places or be certified by the National Park Service as a contributing structure in a historic district. During the rehabilitation process, the developer and the project architect and/or architectural historian work closely with the National Park Service and the State Historic Preservation Office to ensure the rehabilitation is in keeping with the Secretary of Interior’s Standards for Rehabilitation, the standard by which the completed rehabilitation will be inspected for final certification.
Many states have also established historic preservation incentive programs similar to the federal program, including Virginia, Maryland, North Carolina and West Virginia. Virginia has the Rehabilitation Tax Credit program, a 25% state income tax credit on qualifying expenditures, that is available for both income-producing and owner-occupied properties and is administered by the Virginia Department of Historic Resources. Qualifying projects may be eligible to receive both federal and state historic tax credits.
If the property owner cannot fully utilize the historic tax credits, the credits can often be monetized through identifying investor partners to participate in the project. Recent decisions by courts in the third and fourth circuits require that such partnerships be reviewed carefully to address concerns identified by both courts.
The New Markets Tax Credit (NMTC) program may be used to help finance a wide range of business ventures from operating businesses and renewable energy facilities to the construction of new developments and rehabilitation of historic structures. The overarching goal of the NMTC program is to encourage investment in economically disadvantaged communities.
Qualifying investments result in investors receiving a federal income tax credit equal to 39 percent of the original investment amount, which are claimed over a seven year period.
The NMTC program is only approved through 2013. The President’s proposed budget for fiscal year 2014 proposes to permanently reauthorize the NMTC program, at a level of $5 billion in allocations per year, and would allow the new market tax credits to be used to offset Alternative Minimum Tax (AMT) liability. We will have to wait and see if the proposal is included in the final budget.
For more information about project eligibility and utilizing tax credit incentive programs to benefit your project, please contact Gentry Locke attorneys Bruce Stockburger or Christen Church.