Preserving History with the Rehabilitation Tax Credit

Preserving History with the Rehabilitation Tax Credit

by | Dec 24, 2020 | Business Tax

The Rehabilitation Tax Credit is one of the more unique pieces in the tax code. It’s a tax credit that incentivizes owners of qualified old or historic buildings to renovate and restore those properties into working, business-related order. It allows a credit of up to 20% of the taxpayer’s qualifying costs involved in restoring the building.

Qualified Rehabilitated Building?

For an owner to claim the Rehabilitation Tax Credit, the building must be a “qualified rehabilitated building.” To qualify, the building needs to meet these standards set in IRC § 47:

  • The building must be a certified historic structure, such as through the National Register of Historic Places.
  • The building must be substantially rehabilitated, which means the expenditures for restoring the property during a 24 month period are greater than $5,000 OR the adjusted basis of the building.
  • Depreciation must be allowable with respect to the building.
  • The building must have been placed in service (for a business purpose) before the beginning of rehabilitation.

Owners of qualified rehabilitated buildings may be individuals or corporate entities, such as trusts.  A 24 or 60 month substantial rehabilitation test exists for owners.

Rehabilitation Tax Credit

The tax credit is valued up to 20% of the taxpayer’s qualified rehabilitated expenditures (QREs) used to rehabilitate the building. For expenditures to qualify as QREs:

  • Expenditures must be for nonresidential real property, residential real property (only if a certified historic structure), or real property that has a class life of more than 12.5 years.
  • Expenditures incurred in connection with the rehabilitation of a qualified rehabilitated building.
  • Expenses must be capitalized and depreciated using the straight line method.
  • Expenses in connection to the rehabilitation of a building must be certified by the Secretary of Interior as being consistent w/ the historic character of the property where it is located.

Costs used to acquire or expand the property do not qualify as QRE.  Claiming the credit was amended through the Tax Cuts & Jobs Act (TCJA) of 2017 so that it must be claimed “ratably” over a span of 5 years, rather than all in a single year (pre-TCJA).

Just like other general business credits, unused credits may be carried backward or forward (up to 5 years). Use Form 3468 to claim the rehabilitation credit (and of course if you claim more than one business credit, don’t forget to use Form 3800 for the General Business Credit form).

A tax credit for historic buildings is one of many interesting things that business owner can utilize from the tax code. Having a knowledgeable support team, such as us here at MiklosCPA, to point out these unique pieces can potentially help owners effectively run their business or even see future avenues of growth. We are a California-based CPA firm that assists small and emerging clients in assorted industries. Schedule a call with us and learn how we can help your business! Don’t forget to also check out our social media pages for more “good-to-know” tax tidbits and other

Business Assets & an Appreciation for Depreciation

Business Assets & an Appreciation for Depreciation

by | Dec 11, 2020 | Business Tax

Let’s start off with a little joke. “What did the accountant say to his business client who insisted that his company’s return get filed, ASAP? …….I depreciate if you didn’t.”

Corny puns aside, depreciation is an important concept in accounting and tax. In accounting, depreciation is a method that is used to spread out the cost of an asset, like a vehicle, over its useful life expectancy, rather than expensing it all out in one year and throwing your accounting records off. In tax, the depreciation amount is often used as a deduction and may allow you to recover some of the costs on certain property used in a business.

Depreciating Value

Assets like vehicles, furniture, equipment, and buildings may be depreciated. Generally, it should have a useful life beyond a year and have a salvage value after it lasts beyond its useful life. Land cannot be depreciated though since its treatment is handled more uniquely. In accounting, there are different types of depreciation when recording the depreciation of assets, such as straight-line, double declining balance, and units of production. For example:

Jack purchased a $13,000 vehicle for his business with a salvage value of $2000 after 5 years.  He uses the straight-line method of depreciation ($13,000 cost – $2,000 salvage value / 5 year useful life) and calculates a depreciation of $2,200 each year.

Other depreciation methods like double-declining balance allow for more depreciation in its first few years, or “units-of-production” allow for depreciation based on the usage of an asset, such as a factory machine producing items. The method you choose can affect how much depreciation applies each year and matters to your business.

Depreciation & Tax

The amount that you depreciate on your assets is reported for your taxes and operates like a deduction, such as reporting your depreciation on business assets to the IRS on Form 4562. However, calculating your depreciation within the required guidelines becomes a topic in itself, such as the MACRS depreciation system used by the IRS.

 

Depreciation and the methods your business chooses to depreciate its assets are essential things to consider as your business grows. It can affect your own accounting records in the expenses reported and potentially your profit & loss reports. For tax, depreciation may potentially affect how much you ultimately owe to the government. Depreciation gets tricky, and business owners can make the right choices by having the right advisors, like us here at MiklosCPA. We support small and emerging business clients of assorted industries with their tax and accounting needs. Learn how we can help your business & schedule a call with us! Also check out our social media pages for more useful “good-to-know” articles like this one.

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