Real property owners and developers often consider the federal Historic Tax Credit (HTC) when evaluating whether to acquire and substantially rehabilitate historic buildings. Unfortunately, the Tax Cuts and Jobs Act (TCJA) repealed the 10% federal HTC and modified the 20% federal HTC. These changes, which are effective for taxable years beginning after 2017, will likely impact the acquisition and rehabilitation of historic buildings.
Repeal of the 10% HTC
Before the TCJA, taxpayers could claim a 10% federal HTC for expenditures paid or incurred to substantially rehabilitate non-certified pre-1936 buildings. Unfortunately, the TCJA repealed this provision.
Modified 20% HTC
Before the TCJA, taxpayers could claim a 20% federal HTC for expenditures paid or incurred to substantially rehabilitate a certified historic building. The 20% federal HTC continues, but the timing for claiming the federal HTC has changed.
Before the TCJA, the federal HTC was claimed for the taxable year in which the certified historic building was placed in service after substantial rehabilitation. A “certified historic building” means a building which is listed in the National Register of historic places, or is located in a registered historic district and certified to the Secretary of the Treasury by the Secretary of the Interior as being of historic significance to the district.
The TCJA modified the timing for claiming the 20% federal HTC. Under the new rules, the federal HTC is claimed ratably over a 5-year period beginning with the taxable year in which the certified historic building is placed in service after substantial rehabilitation. This change impacts the overall return on investment for the rehabilitation of certified historic buildings.
In addition, excess federal HTCs generated for the taxable year in which the certified historic building is placed in service after substantial rehabilitation will diminish. Excess federal HTC’s means HTC’s exceeding federal income tax liability for the taxable year in which claimed. Such excess HTC’s may be carried back to the immediately preceding taxable year by filing a carry back claim resulting in a refund of federal income taxes paid in the preceding tax year. However, under the new rules, the ability to generate excess HTCs will diminish.
Listen to a podcast from Freed Maxick Tax Director Don Warrant on how the Historic Tax Credit can generate 40% cash reimbursement for property owners.
The TCJA provides a transition rule whereby the changes made by the TCJA do not apply to expenditures paid or incurred by the end of the taxable year in which the 24-month period, or 60-month period, ends when the following two conditions are met:
- The building was owned or leased during the entirety of the period after December 31, 2017, and
- The date of the beginning of the 24-month or 60-month period is no later than June 20, 2018.
The 24-month period and the 60-month period are in reference to the period over which the certified historic building must be substantially rehabilitated.
Under this transition rule, all expenditures should be paid or incurred by the end of the taxable year in which the 24-month or 60-month periods end.
Tax Basis Reduction Rules
The TCJA did not affect the rule that requires the tax basis of the certified historic building to be reduced by the amount of the HTC claimed. Generally, tax basis reduction rules don’t apply when federal tax credits are claimed over multiple tax years. Fortunately, a bipartisan group of House and Senate lawmakers introduced legislation that would eliminate the rule that requires the tax basis of the certified historic building to be reduced by the amount of the HTC claimed. However, no further action has been taken on this legislation as of the time of this writing.
States that follow the federal HTC rules may adopt the changes made by the TCJA or decouple from those changes.
For example, New York State provides a refundable HTC equal to the amount of the federal HTC. However, New York State has decoupled from the changes made by the TCJA. Therefore, taxpayers can continue to claim the 20% New York State HTC for the taxable year in which the certified historic building is placed in service after substantial rehabilitation.
For Further Clarification and a Discussion of Your Situation
The Freed Maxick Tax Team has significant experience when it comes to helping real property owners and developers qualify for and claim historic tax credits as well as other Federal and state tax credits. With an ever-changing tax landscape, our team is prepared to assist real property owners and developers to minimize their income tax liabilities using the various tax credit and incentive programs, and other tax minimization strategies.
For more information on how the changes made by the TCJA might impact your historic rehabilitation project, or to discuss other changes made by the TCJA, please call us at 716.847.2651 or contact us here.View full article
Use this handy guide from the international tax experts at Freed Maxick to pinpoint your Sec 965 compliance requirements re: foreign earnings
Included in the Tax Cuts and Jobs Act of 2017, Sec. 965 requires US shareholders to pay a transition tax on certain, specified foreign earnings as if those earnings had been repatriated.
Sally P. Schreiber, J.D, writing in The Tax Advisor blog states that, “Sec. 965 applies to the last tax year of certain specified foreign corporations beginning before Jan. 1, 2018, and the amount included in income is includible in a U.S. shareholder’s year in which or with which such a specified foreign corporation’s year ends.”
Consequently, some taxpayers have discovered they are responsible for paying this transition tax when filing their 2017 tax returns.
Our team made a closer examination of who is required to comply with the Sec 965 transition tax on their April 2018 return or extension. We put our findings into a decision tree that will help you understand and discuss your obligations with your tax advisor.
You can download this complementary tool by clicking on the button.
Sec 965 Tax Reform Assistance
Our international tax team is available to answer any questions about Sec 965 tax reform or other international tax compliance obligations you might have because of the new tax act.View full article
Author: Lindsey Miller
There’s no secret that the new tax plan approved by Congress and sent to President Trump is very generous to many different types of companies and industries, including those that have foreign income producing activity.
In 2018, both small and large businesses will see significant change to their tax situation, and will need to do planning early in the year to maximize tax benefits throughout the year.
Key Changes in the New Tax Plan for Companies
The 500-page bill includes the following key changes for US based companies with domestic and foreign operations:
1. Corporate tax rate
- Cut from 35% to 21%
- Repeals the corporate AMT
Freed Maxick Insights
With the new rate beginning in 2018, it gives corporations very little time to push through deductions at the higher rate. With such a drastic decrease to the corporate rate (40%), it could result in pass-through entities converting to C corporations.
2. Pass Through businesses
- Establishes a 20% deduction of certain business income, but deductions are limited once the income reaches $157,500 for singles and $315,000 for joint.
Freed Maxick Insights
As mentioned above, it is possible to see pass-through businesses convert to C corporations with the new corporate tax rate.
But be careful, this provision does not apply to all pass through businesses. Certain specified service trade or businesses are excluded.
3. Deductions and Credit
- Numerous deduction and credits eliminated including Domestic Production Activities, non- real property like kind exchanges and others
- Research and development expenses are now amortized over five years, beginning in 2023
- Rehabilitation credit remain but have been modified
- Interest expenses limited to 30% of modified taxable income number
Freed Maxick Insights
With a 40% decrease in the corporate tax rate, the effect of losing these deductions or credits could increase your effective tax rate. Tax credits are still available, so if your business largely relies on tax credits, it will be important to understand the impact and what remains.
4. Bonus Depreciation
- Increased from 50% to 100% deduction of costs of depreciable assets can be taken in one year but equipment must be purchased after September 27, 2017, and before January 1, 2023
Freed Maxick Insights
This will be a huge planning opportunity for many businesses; with no taxable income limitation on bonus depreciation (unlike Section 179 expensing), businesses will be able to take advantage of fully expensing acquisitions (new or used!) in the year placed in service.
5. International Tax
- Current "worldwide" tax system changed to a territorial system where corporations will not be taxed on foreign profit
- Companies can repatriate cash held overseas by paying a one-time mandatory tax, based on foreign earnings and, at a tax rate of 15.5% on cash and 8% on property
Freed Maxick Insights
With the new tax on deemed repatriation, it may be great time for businesses to bring money back and invest in the U.S.
Of course, if you have any questions or concerns, call the Freed Maxick Tax Team at 716.847.2651 to discuss your tax situation. Or, connect with us here to schedule a Tax Situation Review.
For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.View full article
The incoming administration in Washington and the majority in Congress—both from the same political party for the first time in years—indicate that massive tax reform will be a topic of discussion, if not a reality, in 2017. What does this mean for the commercial real estate industry?
Stage is Set for Tax Reform
Members of both parties in Congress have recently highlighted tax reform plans, even working overtime into the legislative break. Many lawmakers have long held that reform is overdue—a badly needed simplification and redesign of the U.S. Tax Code.
U.S. House Ways and Means Committee chief tax counsel, Barbara Angus, has gone on record saying that tax reform legislation is being crafted to be ready in early 2017, a bill expected to be derived from the House GOP “Better Way” tax reform blueprint released last summer.
Senate Majority Leader Mitch McConnell (R-KY) has said that Republican lawmakers anticipate two budget resolutions in 2017: the first concerning repeal of the Patient Protection Affordable Care Act, the second addressing tax reform.
The Current (December 2016) Tax Reform Agenda
At this point, no one can say how tax reform will shake out and what details of various aspects of any reform will affect different taxpaying individuals and entities. In terms of overall effect, the looming reform has been likened to the tax reform of 1986—which was a bit of a nightmare.
Some general points of any likely reform:
- Simplified total number of tax brackets, from the current seven to about three
- Increase in standard individual deduction
- Elimination or capping of most individual tax deductions
- Repeal of estate and gift taxes
Possible reform measures that would impact the commercial real estate industry:
- Full and immediate expensing on the purchase price of a building, instead of taking depreciation deductions on a building’s cost over many years
- Limitation or elimination of the business interest expense deduction
- Section 1031 may not be preserved
- A single tax rate for business pass-through income
Tax Change Intensifies Need for 2016 Cost Segregation Study
Given that reform items under discussion include changes to depreciation and expensing for building purchases, there’s a chance that the tax year 2016 may be the best year for commercial property owners to take advantage of doing a cost segregation study.
The upshot: tax savings accruing from accelerating depreciation may be taken off the table as a tax minimization strategy in future years.
We stress again: All speculation about specifics of the coming tax reform is just that, speculation. It does seem that the commercial real estate industry and other businesses will see some more generous tax rates—but, when they factor in the proposed broadening of the tax base and loss of deductions, certain businesses and their owners may realize limited tax savings or possibly a tax increase.
It also seems that cost recovery might soon become an even more highly complicated process, especially when you factor in how each individual state will seek to either conform or decouple from the federal rules.
(One note: Tax reform discussion also has yet to engage the commercial real estate industry and professionals who serve that industry.)
Though specifics remain unclear right now, looming tax reform only intensifies the importance of performing a cost segregation study for the 2016 tax year, or for prior tax years, and recognize the tax savings now.
Contact us or call Don Warrant, CPA at 716.847.2651 to discuss the tax savings opportunities that are available for commercial real estate owners for the 2016 tax year.View full article