Wednesday, May 24, 2017
TEN IMPORTANT CHANGES TO THE ALABAMA HISTORIC TAX CREDIT PROGRAM
The Alabama legislature has passed a bill (HB 345) renewing the state historic tax credit program that expired in 2016. The new legislation will make available annually an aggregate of $20,000,000 of historic tax credits for qualifying projects beginning in 2018. As with the prior state historic tax credit program, the new legislation provides a tax credit against Alabama income tax of 25% of the qualified rehabilitation expenditures (“QREs”) incurred to rehabilitate a qualifying historic structure. There are, however, several significant changes to the original Alabama historic tax credit program including the following:
1. Addition of Refundability. Among the most significant of modifications to the Alabama historic tax credit program is the addition of the ability for the taxpayer to collect a refund equal to the amount which the claimed historic tax credit exceeds the claimant’s tax liability. In the year the taxpayer claims the credits on the taxpayer’s tax return (the year the rehabilitated structure is placed in service), the credits are applied to the claimant’s income tax liability. Under the prior program, any unused credits in excess of the claimant’s tax liability were carried forward for future use. Under the new program, however, any excess credit amount is refundable in the year the credits are claimed. This change allows more taxpayers claiming historic tax credits under the new legislation to realize an immediate benefit regardless of the claimant’s income tax situation.
2. Added Flexibility in Transferring Credits. As with the prior program, reserved historic tax credits may only be transferred once. Following the transfer, the transferee is the only person or entity that may claim the tax credits. A significant change provided under the new program, however, is that the historic tax credits are claimed at the entity level, in contrast to the pass-through structure of the prior program. This change provides added flexibility in transferring the historic tax credits by transfer of membership interests of an entity that has been allocated credits (prior to the structure being placed in service).
3. New Restrictions on Pricing of Credit Transfers. Although transferability restrictions have been broadened, as discussed above, the new legislation imposes a pricing floor when transferring the historic tax credits. Credits cannot be transferred at less than 85% of their present value.
4. Special Emphasis on Rural Projects. To encourage rural development, the legislature has carved out 40% of the annual historic tax credits, or $8,000,000 per year, to dedicate to proposed projects located in counties which do not exceed 175,000 in population. In the event that any of the reserved credits are not awarded to projects in these rural areas by the end of the second quarter of a program year, the credits for that year may be re-allocated among the general pool of historic tax credit applications.
5. Establishment of an Evaluating Committee to Prioritize Credit Allocation. In contrast to the prior program, which ranked historic tax credit applications on a first-come first-served basis, priority in allocation of the historic tax credits under the new legislation will be determined by the Historic Tax Credit Evaluating Committee. The Committee will review applications for historic tax credit allocation and rank proposed projects after consideration of several factors including (i) relative value and historical significance of the proposed project to the community in which the proposed project is located, (ii) possible return on investment for the community in which the proposed project is located, (iii) geographic distribution of past and current projects, and (iv) strength of local support for the proposed project. In addition, because of the nature of the new allocation process, the Alabama Historical Commission is no longer required to notify applicants of a decision within 90 days of a submitted application.
6. Age Limitation of Certified Historic Structures. To qualify for tax credits under the new legislation, a certified historic structure must be at least 60 years old unless it is located within the boundaries of a national monument or park, in which case the federal law applies. This differs from the prior program, which in most cases only required that the historic structure be at least 50 years old.
7. Qualifying Structures. Under the new legislation, historic tax credits are only available for properties listed in the National Register of Historic Places, properties eligible for listing in the National Register of Historic Places, properties certified by the Alabama Historical Commission as contributing to the historical significance of a Registered Historic District or certified historic residential structures. This is a change to the prior program which expressly included structures placed in service prior to 1936, regardless of historical significance.
8. Imposition of Deadlines on Incurrence of Project Costs and Project Completion. The new legislation keeps the requirement that 20% of the estimated rehabilitation costs be incurred within 18 months of the date of written notice of issuance of the tax credits to the applicant. Additionally, the new legislation imposes two additional requirements: (i) 50% of the estimated rehabilitation costs must be incurred within 36 months of the date of written notice of issuance of the tax credits to the applicant and (ii) the project must be completed within 60 months of the date of written notice of issuance of the historic tax credits to the applicant. If these deadlines are not satisfied, the reserved historic tax credits of the taxpayer can be rescinded by the Alabama Historical Commission.
9. Important Dates. Additional rules and regulations will be released by the Alabama Historical Commission by October 1, 2017, and applications for the reservation of historic tax credits under the new legislation will be accepted starting November 1, 2017.
10. Increased Application Fees. The fee structure for the program has been revised. Under the new legislation, for projects in which (i) QREs are $1,000,000 or less, the fee is 1% of QREs; (ii) QREs exceed $1,000,000 but do not exceed $10,000,000, the fee is $15,000; and (iii) QREs exceed $10,000,000, the fee is $20,000.
This article is intended to provide an overview of the new Alabama historic tax credit program, and shall not be considered legal advice. For more information in connection with historic tax credits, contact any of the attorneys listed below.