If your business occupies a large space and needs to expand or move to a new space in the future, it’s important to keep the rehabilitation tax credit in mind. If you appreciate the charm of historic buildings, this is especially true.
The federal rehabilitation tax credit is designed to encourage the preservation of historic properties and neighborhoods by private sector entities. It is administered by the IRS and the National Park Service.
This tax credit is equal to 20% of the qualified rehabilitation expenditures (QREs) for a qualified rehabilitated building that’s also a certified historic structure. A qualified rehabilitated building is a depreciable building that has been placed in service before rehabilitation has begun, is still in service after that rehabilitation, and is used for either business or the production of income (not held primarily for sale).
In addition to these rules, the building must be “substantially rehabilitated,” which typically requires that QREs for rehab are greater than $5,000 or the adjusted basis of the existing building.
A QRE is any amount that is chargeable to capital and has been incurred in connection with rehabilitation or reconstruction of an eligible building. QREs must be for an existing property, do not apply to land, and cannot include building acquisition or enlargement costs.
The 20% credit is allocated ratably to each year in the five-year period beginning in the tax year in which the building was placed into service. The credit allowed in each year of the five-year period is 4% (20% divided by 5) of the QREs in regard to the building. This credit is allowed against both alternative minimum tax and regular federal income tax.
The Tax Cuts and Jobs Act, signed at the end of 2017, added some changes to the credit. Specifically, the law:
- Requires taxpayers to take the 20% credit ratably over five years instead of in the year they placed the building into service
- Eliminated the 10% rehabilitation credit for pre-1936 buildings
An experienced business accountant can explain the rehabilitation tax credit in-depth and assist you in discovering any other federal tax benefits available for the space you’re considering. For example, certain tax benefits may be available depending on your preference for how a building’s energy needs will be met and where the property is located. There may also be state or local tax and non-tax subsidies available for certain locations.
The professionals at Smolin Lupin do this and more, for example, collaborating with clients and construction professionals to determine whether a particular building can be the subject of a rehabilitation that’s both practical to use and tax-credit-compliant.
If you find a building you wish to rehabilitate, we can help you monitor project costs and substantiate the compliance of the project in accordance with the requirements of the rehabilitation credit and any additional tax benefits for which you’re eligible.