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House Tax Reform Bill Eliminates HTC, Senate Bill Preserves It at 10 Percent
For proponents of the federal historic rehabilitation tax credit (HTC) and the communities that benefit from the catalytic investments it promotes, tax reform legislation presents a dark option: Half or none.
The House of Representatives version of the Tax Cuts and Jobs Act (HR 1) that the full House will consider this week includes a provision to repeal the HTC, effective at the end of 2017. It would end a credit that has been part of the Internal Revenue Code since 1978. A transitional rule in the House bill would allow for HTCs to be claimed with respect to any building owned or leased by the taxpayer at all times on or after Jan. 1, 2018. Under this transition rule, within 180 days of enactment, a qualifying taxpayer would need to begin their 24-month rehabilitation measuring period. Thus, any qualified rehabilitation expenditures incurred for such buildings prior to Dec. 31, 2020 could be eligible for HTCs. However, even the transitional language as currently drafted raises more questions than it answers.
The Senate version of the bill is less harsh, but still difficult: According to the legislation and summary documents released last week by the Senate Finance Committee, the Senate version of the Tax Cuts and Jobs Act would repeal the 10 percent non-historic rehabilitation tax credit and reduce the percentage of qualified rehabilitation expenses eligible for the HTC from 20 percent to 10 percent. The Senate bill has a transition rule that is similar to the current House draft
Since the bills were introduced the process has continued. On Sunday, Sen. Bill Cassidy, R-La., filed an amendment that would restore the 20 percent credit, but it would be earned over five years instead of at the placed in service date. So rather than an HTC at one-half of the current rate, the amendment proposes the full 20 percent HTC, but earned over time. Thus, when evaluating this proposal, one must look at the equivalent credit on a present value basis which would range from approximately 17.9 percent to 14.8 percent based on discount rates ranging from 6 percent to 18 percent, resulting in a loss of value ranging from 11 percent to 26 percent. Note, these estimates don’t include the effect a lower corporate tax rate of 20 percent (vs. 35 percent) has on the present value of tax losses nor on the present value of the tax cost associated with taxation of the 100 percent basis adjustment or related 50(d) income and cash flow. Novogradac & Company is currently modeling these effects and will be publishing those results as they become available.
Both tax plans also have other provisions affecting the tax benefits associated with historic tax credit investing. The House plan has no limit on the ability of real estate businesses to deduct interest expense, whereas the Senate bill does generally limit interest expense deduction for all businesses, including real estate. That said, a real estate business can elect out from the interest expense limitations. However, if a business elects out, they must depreciate their real property using its alternative depreciation system (ADS) depreciation life, which is 40 years. On Tuesday, the chairman’s modification shortens the ADS recovery period for residential rental property from 40 years to 30 years. For nonresidential rental property, this is nearly a 25 percent reduction to the current 39-year life, for residential rental property, this is close to the current 27.5 year life.
One thing is certain: both the House and Senate bills will continue to evolve over the coming weeks, and with continued strong advocacy, it is possible that Congress may restore the full value of the HTC during that consideration. In the meantime, historic preservation advocates should continue to reach out to members of Congress to tell them of the benefits that will be lost to communities all across the country if the HTC program is eliminated. The National Park Service recently released the latest report on the HTC from Rutgers University, which found that since its inception in 1978, the federal HTC has attracted $131 billion in private investment for the rehabilitation of 42,293 historic buildings, creating over 2.4 million jobs and serving as a net-revenue generator for the U.S. Treasury: the $29.8 billion in federal taxes generated by HTC projects exceeds the $25.2 billion in credits allocated.