Tax Reform Bill Retains Federal Historic Tax Credit and Eliminates Pre-1936 Rehabilitation Credit; Other Tax Credits Appear Safe
The House and Senate Conference Committee have come to terms on the Trump administration’s overhaul of the current tax code. The new tax bill reinstates the 20 percent Federal Historic Tax Credit (“HTC”), but eliminates the 10 percent tax credit provided for rehabilitation of non-certified buildings predating 1936 (“Pre 1936-HTC”).
HTCs are a powerful tool in attracting private capital to restore historic buildings. HTCs allow investors to recoup 20 percent of the eligible expenses they incur in rehabilitating historically significant buildings via a credit toward federal taxes. Many states, including Nebraska, provide similar credits against state income tax. Nebraska’s program is not directly tied to the federal program, therefore the federal tax legislation should not affect the state program.
In November, the House of Representatives passed a bill that eliminated both HTCs and Pre 1936-HTCs. Through considerable lobbying efforts, tax credit advocates successfully restored HTCs, with the caveat that investors recoup the credits over five years (4 percent per year), rather than all in the first year after the building is placed into service. It appears the amortization of HTCs is the biggest change under the new tax bill. Advocates were unable to restore Pre 1936-HTCs.
While many believed the tax bill would eliminate the federal New Market Tax Credits (“NMTCs”) and the Low-Income Housing Tax Credits (“LIHTCs”), it appears both are safe for the time being. However, the decrease in the federal corporate tax rate under the new tax bill (from 35 percent to 21 percent) could result in a commensurate decrease in equity that developers are able to raise via LIHTCs and NMTCs. Investors (primarily banks) may divert the 14 percent savings realized from the decrease in federal taxes away from tax credits. Some estimate this could result in $2.2 billion less in available annual LIHTCs, and up to 16,000 fewer low-income housing units per year.
The Senate and House are expected to adopt the new tax bill this week. President Trump will likely sign the bill into law prior to the end of 2017. While the bill will be effective on January 1, 2018, Congress can make minor changes to the HTCs via a “Technical Corrections” bill in 2018.