The “Tax Cuts and Jobs Act” (the Act) has passed both chambers of Congress awas signed by President Trump on December 22, 2017. The final agreement among House and Senate Republicans includes rate cuts for “C” corporations, individuals and pass-through businesses, which are further summarized in our Federal Tax Alert.
While the initial plan from the House would have only preserved the Research & Development (R&D) Tax Credit and Low-Income Housing Tax Credit (LIHTC), the conferees’ agreement also preserved the Historic Rehabilitation Tax Credit (HTC), the New Markets Tax Credit (NMTC), and the Investment Tax Credit for energy projects, with some modifications to the HTC that could require developers to take action before the end of the year.
This alert summarizes the Act’s impact on these credits and highlights how the Act differs from the bills that passed both chambers earlier. Excerpts from the Conference Committee summary of the compromise bill regarding these five credits can be found on our website.
Historic Rehabilitation Tax Credit
House: Repeal the HTC, effective for amounts paid or incurred after December 31, 2017, subject to a transition rule.
Senate: Retain the 20 percent HTC but provide that the credit must be claimed ratably over a five-year period beginning in the year when the project is placed in service. Also, eliminate the 10 percent credit for non-historic structures (i.e., buildings placed in service before 1936), subject to a transition rule.
Joint Agreement: Same as the Senate but with a clarification to the transition rule. The changes generally apply to qualified rehabilitation expenditures paid or incurred after December 31, 2017, unless the building is (i) “owned or leased by the taxpayer during the entirety of the period after December 31, 2017” and (ii) the 24-month period selected by the taxpayer (or the 60-month period selected by the taxpayer under the rule for phased rehabilitation) for determining whether the substantial rehabilitation test is satisfied must begin no later than 180 days after the date of the enactment of the Act, i.e., June 21, 2018.
Developers and other parties who are currently evaluating the use of historic tax credits to finance their projects should take steps by the end of the year to ensure or confirm that the title to the underlying property is in the right entity and that such owner entity is treated as a partnership for federal tax purposes.
New Markets Tax Credit
House: Terminate the NMTC after December 31, 2017, which would allow previous allocation of these credits before that date to be preserved.
Senate: Not addressed.
Joint Agreement: Not addressed, thus preserving the NMTC as currently authorized through 2019, retaining the 2017, 2018 and 2019 annual allocation rounds at $3.5 billion each.
Energy Investment Tax Credit
House: Eliminate the 10 percent investment tax credit for energy projects that begin construction after 2021 (2027 for solar energy property). The 30 percent investment tax credit for solar energy and fiber optic solar energy property would be available for projects that begin construction before 2020 and would then be phased out for projects that begin construction before 2022.
Senate: Not addressed.
Joint Agreement: Not addressed, thus preserving the investment tax credit for certain renewable energy projects, including solar and wind, without any changes to current law.
Research and Development Tax Credit
House: Preserve R&D tax credit.
Senate: Preserve R&D tax credit.
Joint Agreement: Same as House and Senate and thus preserves the R&D tax credit and allows the credit to be taken against the newly created Base Erosion and Anti-Abuse Tax.
Low Income Housing Tax Credit
House: Preserve the LIHTC.
Senate: Generally, preserve the LIHTC but replace the current public use requirement exception for artist housing with one for veterans; reduce the offset of basis for buildings in high cost areas from 130 percent to 125 percent; treat rural areas as difficult development areas for purposes of receiving a basis boost.
Joint Agreement: Same as House and thus simply retains the LIHTC with no modifications.