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