United States: 2017 Federal Tax Reform Legislation As Finally Enacted Preserves New Markets Tax Credits And Also Historic Tax Credits, With Some Modifications

On Dec. 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act (the "Act"), enacting broad reforms to the Internal Revenue Code. In previous BakerHostetler Alerts published Nov. 8 and Nov. 10, we outlined the potential impact on New Markets Tax Credits ("NMTCs") and Historic Tax Credits ("HTCs") under the legislative proposals that had been passed by the House and Senate, respectively. A congressional conference committee convened to reconcile the provisions of the separate House and Senate bills, the result of which is the Act. The Act largely tracks the final Senate bill with respect to NMTCs and HTCs. It retains the NMTC program through its 2019 allocation round, and it maintains the HTC program with some limitations and revisions. Other provisions of the Act will also have a collateral effect on NMTCs and HTCs.

New Market Tax Credits

Under prior law, the NMTC program, provided under Section 45D of the Code, was authorized through the 2019 round, with $3.5 billion of NMTC allocations available for each annual round. The House bill would have eliminated the 2018 and 2019 allocation rounds that were previously authorized under the PATH Act in December 2015. The Senate bill did not address NMTCs, leaving prior law relating to NMTCs unaffected by the Act.

Fortunately, the Act follows the Senate bill and does not adopt the House bill's effective repeal of the NMTC. Accordingly, Section 45D of the Code remains unchanged, with $3.5 billion in NMTC allocations available for each of the 2017, 2018 and 2019 calendar year rounds. This includes the $3.5 billion of NMTC awards from the 2017 allocation round that are expected to be announced in the next month or so. Industry participants will continue their historical efforts to extend or make permanent the NMTC program through future tax extender bills and other legislative efforts.

Historic Tax Credits

Under prior law, Section 47 of the Code provided HTCs in the amount of (i) 20 percent of qualified rehabilitation expenditures ("QREs") incurred with respect to certified historic structures and (ii) 10 percent of QREs incurred with respect to pre-1936 buildings that are not certified historic structures. The House bill would have repealed Section 47 of the Code, eliminating HTCs for all QREs paid or incurred after Dec. 31, 2017, subject to a transition rule. The Senate bill called for a repeal of the 10 percent credit available with respect to pre-1936 buildings. The Senate bill retained the 20 percent credit for QREs incurred with respect to certified historic structures, but also provided that the HTCs must be claimed ratably over a five-year period for QREs paid or incurred after Dec. 31, 2017, subject to a transition rule.

The Act predominantly follows the Senate bill with respect to HTCs. Thus, the 10 percent credit for pre-1936 buildings no longer exists and the 20 percent credit for certified historic structures remains, but must be claimed ratably over a five-year period. These revisions are effective for QREs paid or incurred after Dec. 31, 2017, subject to a transition rule.

The transition rule provides that QREs with respect to either certified historic structures or pre-1936 buildings that are owned or leased by the "taxpayer" during the entirety of the period after Dec. 31, 2017 will continue to generate HTCs as under prior law, provided that the taxpayer's 24-month measuring period (or 60-month period, in the case of phased rehabilitations) begins not later than 180 days after the enactment of the Act (i.e., June 20, 2018). Even for those taxpayers who qualify for the transition rule, any QREs paid or incurred after the end of the tax year in which the applicable measuring period ends will be subject to the new HTC timing rules. Legislative history suggests that the term "taxpayer" as used in the transition rule refers to the person who undertakes the rehabilitation of the building. Accordingly, in the context of the transition rule, the term "taxpayer" appears to refer to the regarded taxpayer entity (e.g., partnership) that is treated as generating the QREs in connection with the rehabilitation of the building. Thus, in a lease pass-through transaction structure, the "taxpayer" would seem to refer to the lessor. These and other aspects of the new HTC rules are subject to possible further clarification and additional guidance. In addition, the Act's elimination of partnership technical terminations also could be helpful to taxpayer partnerships that would like to meet the Act's HTC transition rule, but also would be looking to admit a tax credit investor or another partner after year-end 2017.

Base Erosion and Anti-Abuse Tax ("BEAT")

Another point of concern in the Act for HTC and NMTC stakeholders is the imposition of the base erosion and anti-abuse tax, or "BEAT," under Section 59A of the Code. The BEAT applies to corporations (other than RICs, REITs, or S corporations) that meet specified annual gross receipts and base erosion thresholds. The BEAT effectively creates a new form of "alternative minimum tax" for U.S. corporations with significant offshore operations, including some investors in NMTCs and HTCs. Only (i) the research credit under Section 41(a) of the Code and (ii) 80 percent of each of the low-income housing tax credit under Section 42(a) of the Code, the renewable energy production credit under Section 45(a) of the Code, and the energy investment credit under Section 48 of the Code are excluded from the calculation of "regular tax liability" used to calculate the BEAT through the 2025 taxable year, after which the exception for these credits will expire. The NMTC and HTC did not receive any similar favorable treatment and would therefore increase a corporation's "base erosion minimum tax amount" under Section 59A(b)(1).

Reduction in Corporate Tax Rate

The Act also reduces the corporate tax rate to 21 percent from a maximum of 35 percent under prior law. This will make losses allocated from tax credit transactions less valuable to corporate investors, but also will make taxable income including Section 50(d) income in HTC lease pass-through transactions less costly.

State Tax Credits

With respect to state tax credit programs, because the federal NMTC and HTC programs were left largely intact, the many state NMTC and HTC programs that often closely track their federal counterparts should be left largely unaffected by the Act. Furthermore, states do not necessarily follow the federal statute in terms of when HTCs may be claimed, so it will be important to review the rules of the particular state in any transaction utilizing state credits. In addition, in light of the significant reduction in the federal corporate tax rate, state credits generally should be more valuable to corporate investors after the Act. As a result, state tax credit programs should continue to provide important economic development incentives and sources of financing to projects, much as they have done in the past.

Takeaways

While proposals from the House raised significant concerns in the industry about the prospects for the NMTC and HTC programs under tax reform, the Act makes no change to the NMTC and retains the 20 percent HTC. Although HTCs must now be claimed ratably over a five-year period unless a project qualifies under the transition rule, the HTC program remains a valuable preservation incentive, tool for economic development, and source of financing. Nevertheless, the overall effect of the Act, including the BEAT, on investor demand for and pricing of federal NMTCs and HTCs remains to be seen. Similarly, the possible impact of the lower federal corporate tax rate on investor demand for and pricing of both federal and state tax credit investments in the market also remains to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions