Proposed Regulations Clarify Application of New ‘Ratable Share' Recognition Period for Federal Historic Rehabilitation Tax Credit

Alerts / June 12, 2020

On May 21, 2020, the Department of the Treasury (Treasury) released proposed regulations (the proposed regulations)* regarding the new five-year credit period for the historic rehabilitation tax credit (HTC) under Section 47 of the Internal Revenue Code (the Code). The Tax Cuts and Jobs Act of 2017 (TCJA) amended Section 47 to provide that the full amount of the HTC is no longer allowable in the taxable year the “qualified rehabilitated building” (QRB) is placed in service but instead must be claimed in “ratable shares” over a five-year period. The proposed regulations are intended to clarify the impact of the TCJA changes to the HTC, define ratable share, and explain how to apply the special rules of Section 50 relating to recapture, basis adjustment and leased property under the new five-year regime.

Summary of § 1.47-7 Proposed Regulations
  • Timing of HTC Determination/Five-year Allocation: The proposed regulations make clear that the HTCs attributable to a QRB continue to be determined in the year the QRB is placed in service but are now allocated ratably over a five-year period beginning in the taxable year the QRB is placed in service (i.e., a ratable share of the HTCs is recognized in each of the five years). The proposed regulations also clarify that ratable share means 20 percent of the HTCs. These rules dispel any concern that the TCJA changes resulted in five separate rehabilitation credits for a single QRB or that the ratable share for the year a QRB is placed in service would be prorated based on the number of months/days remaining in such year.
  • Coordination With Section 50: The proposed regulations clarify that the special rules in Section 50 relating to recapture, basis adjustment and the HTC “lease pass-through” structure should be applied using the full HTC generated in the year the QRB is placed in service.
  • Examples: Five examples illustrate the application of the proposed regulations. The examples cover (i) the allocation of the HTC over the new five-year period, (ii) the mechanics of a recapture during the new five-year period, (iii) the amount and timing of the basis adjustment under Section 50(c), and (iv) the application of the Section 50(d) income inclusion in a lease pass-through structure in the new five-year regime. As an example of how the new ratable HTC regime impacts the special rules in Section 50, Example 3 walks through a recapture scenario. X, a calendar year C corporation, incurs “qualified rehabilitation expenditures” (QREs) of $200,000 from Feb. 1 to Oct. 1, 2021, with respect to a QRB. X places the building in service on Oct. 15, 2021, resulting in $40,000 ($200,000 x 0.20) of total HTCs determined in 2021. The ratable share of the HTCs that X may claim each year is $8,000 ($40,000 x 0.20). In 2021 and 2022, X claims the full $8,000 ratable share. On Nov. 1, 2023, X disposes of the QRB. Under Section 50(a)(10)(B)(iii), because the period of time between when the QRB is placed in service and the disposition is more than two but less than three full years, the applicable recapture percentage is 60 percent. Thus, X has an increase in tax of $9,600 under Section 50(a) ($16,000 of credit claimed in 2021 and 2022 x 0.60) and has $3,200 of credits remaining in each year 2023 through 2025 after forgoing $4,800 in credits in each of the years 2023 through 2025 ($8,000 x 0.60). This example clarifies that taxpayers continue to claim reduced HTCs after a recapture event throughout the five-year recognition period, provided the applicable recapture percentage is less than 100 percent.

Applicability and Requests for Comments

The proposed regulations would apply to taxable years beginning on or after the date the regulations become final. However, the proposed regulations also allow a taxpayer to rely on them for QREs paid or incurred after Dec. 31, 2017, if the taxpayer follows the regulations in their entirety and in a consistent manner.

Treasury specifically solicited comments regarding the need for additional examples or new special rules to clarify the interaction of Section 47 with other provisions of the Code and Treasury Regulations. Comments and requests for a public hearing are due July 21, 2020.

Our team at BakerHostetler would be happy to discuss any questions or concerns regarding the proposed regulations or the comment submission process.

Authorship Credit: Alexander J. Szilvas, Christina Novotny, Cary P. Jones and Lucas L. Witters

* Link to Federal Register.

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