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Tax Credit Changes Affect Building Renovations

If you are planning a building renovation, or if you are starting a business and thinking of settling in a building that will need renovations, you might want to do some additional math and consider your move carefully.

Why? The new Tax Cuts and Jobs Act (TCJA) has eliminated one tax credit and changed the structure of another.

What They Used to Be

The first deals with the Rehabilitation Credit, which was 10 percent of qualified expenses for renovating a non-historic, non-residential building that was initially completed and used prior to 1936.

To qualify for the credit, CPA Practice Advisor explained, “The work must have been ‘substantial’ in nature (i.e., expenses over a two-year period exceeded the greater of $5,000 or the adjusted basis of the building and its structural components). Furthermore, the rehabilitation work must have met specific wall retention requirements. Finally, the building had to have been placed in service by the taxpayer before the rehabilitation work was commenced.”

“For this purpose, “qualified expenses” includes architectural and engineering fees, site survey and development fees, legal expenses, and other construction-related costs, as long as they are added to the property’s basis, reasonable in amount and related to services performed.”

The second tax credit, named the Historic Tax Credit (HTC), enacted in 1981, gave those that qualified a 20 percent credit for the rehabilitation costs of buildings listed on the National Register of Historic Places. The work had to be certified, meaning the building retained its original character.

How it Changed

The changes to the tax law, through the TCJA, was significant, and may affect what structures businesses decide to rehab, especially those that are not on the National Register of Historic Places. That is because the Rehabilitation Credit has been eliminated completely.

The HTC remains, but has been restructured. This means that instead of receiving the 20 percent tax credit the first year eligible, it will be divided and four percent will be allowed for each of five years. This means companies need to take that into account when planning a project and talk with their tax professional.

The National Trust for Historic Preservation says retention of the credit is a victory. “It has been used to attract new private capital to the historic cores of cities and Main Streets across the nation. This investment has, in turn, enhanced property values, created jobs, generated local, state and federal tax revenues, and revitalized communities.”

The last time these type of tax credits were revised was in 1986. In 1988, the Washington Post reported on effects of the changes. “Rehabilitation of historic buildings plummeted by 35 percent last year as a result of 1986 tax law restrictions on historic preservation tax credits, according to a recent National Park Service report. The number of projects fell from 2,964 in fiscal 1986 to 1,931 in fiscal 1987, when tax changes became effective. The amount of money invested in historic rehabilitation also dropped by 35 percent over the same period, to $1.1 billion from $1.7 billion, the report said.”

If you own a building, or are considering buying a building that will need renovation, Klein Hall CPAs can help you evaluate the project within the framework of your business, check to see if it will qualify for tax credits, and, if it does, how much you might anticipate getting back.

To make an appointment to take advantage of our business advisory services, contact us today.