November 20, 2017
2017-1970 Many tax credits and incentives affected by House and Senate tax reform proposals On November 9, 2017, the Senate Finance Committee released the Chairman's Mark of the "Tax Cuts and Jobs Act" (Chairman's Mark). The Chairman's Mark adheres to the same basic tax overhaul framework as the tax bill approved by the House Ways and Means Committee (House Bill), but includes significant differences in the design of provisions and their timing. The House and Senate must each pass their versions of the bill and then negotiate an agreement on any differences via conference committee. Upon finalizing a compromise bill, both chambers must pass the final compromise bill and the President must sign it into law. Please see Tax Alert 2017-1848 for analysis of the House Bill. This Alert compares the proposed action regarding certain tax credits under the two proposals. Rehabilitation tax credit Section 47(a) allows a rehabilitation credit of 20% of the qualified rehabilitation expenditures for any certified historic structure and 10% of expenditures for qualified buildings. This credit is taken into account in the year the rehabilitated building is placed in service. | | House Bill | Chairman's Mark | Provision | Would repeal the rehabilitation credit; expected to increase revenues by $9.3 billion over 10 years. | Would eliminate the 10% credit for buildings placed in service before 1936 and reduce the 20% tax credit for certified historic structures to 10%. | Effective date | Effective immediately for both proposals, but transitional relief would allow the credit for qualified expenditures incurred through the end of a 24-month period beginning no later than 180 days after enactment, provided that the building was in taxpayer's control by December 31, 2017. | Implications | Taxpayers that are currently undertaking or are planning to undertake the rehabilitation of a certified historic structure should evaluate their time line to best take advantage of the transitional relief as both proposals would reduce or repeal the program. Taxpayers investing in or utilizing these tax credits will want to review contracts to understand what protections are available to them in the event that project construction continues outside of the transition period. |
New markets tax credit (NMTC) The NMTC Program allows individual and corporate taxpayers to receive a credit against federal income taxes for making qualified equity investments in community development entities (CDEs). The credit totals 39% of the investment and may be claimed by the investor over seven years. The CDE must use substantially all of the investment to make qualified investments in low-income communities. The amount of credits available are determined annually and allocated on a competitive basis. To date, the CDFI Fund has made 1,032 awards, totaling $50.5 billion in tax credit allocation authority. | | House Bill | Chairman's Mark | Provision | No additional new rounds of credit allocation, which would raise an estimated $1.7 billion over 10 years. | No change to current law. | Effective date | 2017 would be the last allocation round of credits, but credits that would have already been allocated could be used over the course of up to seven years. | N/A | Implications | The fact that the House Bill would effectively repeal the NMTC program while the Chairman's Mark leaves the program untouched makes it important for taxpayers or other beneficiaries of this program to carefully follow future Alerts as the proposals move through the amendment process and, if passed, ultimately through reconciliation. |
Work Opportunity tax credit (WOTC) The WOTC is available to qualified employers that hire and retain individuals who are members of certain targeted groups. In general, the credit equals 40% of qualified first-year wages paid to these employees. The credit is subject to various wage limits between $6,000 and $24,000, varying by the specific targeted group. In 2015, the PATH Act extended the WOTC to include wages paid or incurred to an individual who begins work on or before December 31, 2019. | | House Bill | Chairman's Mark | Provision | Would repeal the WOTC, which would raise an estimated $3.6 billion over 10 years. | No change to the current law. | Effective date | — Effective for wages paid or incurred to individuals who begin work after 2017. — Would not disqualify wages paid after December 31, 2017, to eligible employees hired on or before December 31, 2017. — Wages paid to eligible employees should be tracked throughout the 2018 and possibly 2019 tax years in order to calculate and report additional credits on future tax returns. | N/A | Implications | The fact that the House Bill would effectively repeal the WOTC program while the Chairman's Mark leaves the program untouched makes it important for taxpayers to carefully follow future Alerts as the proposals move through the legislative process. |
Deduction for certain unused business credits Section 196 allows a taxpayer to carry unused business credits back one year and forward 20 years. The ability to use the credits, however, generally expires with the death of an individual taxpayer or cessation of a business. | | House Bill | Chairman's Mark | Provision | Would repeal the deduction for unused business credits. | Same as House Bill. | Effective date | Effective for tax years beginning after 2017. | Same as House Bill. | Implications | Taxpayers that are currently carrying forward tax credits or may end up carrying forward of tax credits based upon other provisions of tax reform should evaluate their ability to utilize the tax credits before the end of the tax credit carryforward period. |
Nonrefundable credits Tax credits are available under current law for certain taxpayers or activities. Taxpayers disabled or over 65 receive a tax credit of $7,500 for a couple or $5,000 for an individual. Taxpayers who adopt a child receive a credit of $13,570 per eligible child in 2017.Taxpayers who purchase government-issued private activity bonds (PABs) receive a credit for the interest received from those bond. Taxpayers who purchase plug-in electric motor vehicles receive a credit of up to $7,500. | | House Bill | Chairman's Mark | Provision | Would immediately repeal the tax credits listed. | No change to current law. | Effective date | Eliminated for tax years beginning after 2017. | N/A | Implications | The fact that the House Bill would effectively repeal these credits while the Chairman's Mark leaves them untouched makes it important for taxpayers to carefully follow future Alerts as the proposals move through the amendment process and, if passed, ultimately through reconciliation. Given the House Bill, it may be prudent for taxpayers who use these credits to look for ways to accelerate their activity into 2017 so that they can benefit from the credits before they are repealed. |
Production tax credit (PTC) Section 45 allows a production tax credit (PTC) for electricity produced from qualified energy resources (wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy) and sold to an unrelated person. The PTC is 1.5 cents (indexed annually for inflation, 2.4 cents for 2017) per kilowatt-hour of electricity produced. | | House Bill | Chairman's Mark | Provision | — Would repeal the Section 45 production tax credit (PTC) inflation adjustment factor for electricity and refined coal, reverting the credit to 1.5 cents per kilowatt hour. — Would alter the current rules for when construction begins on a qualified facility, directing that the construction, modification, improvement or addition to any facility may not be treated as beginning before any date until there is a continuous program of construction that begins before such date and ends on the date that such property is placed in service. | No change to current law. | Effective Date | Effective for tax years beginning before, on, or after the date of enactment. | N/A | Implications | The provision would effectively reduce the PTC amount by 35%, back to the statutory 1.5 cents for those projects that begin construction after the date of enactment. The PTC steps down 20 percentage points per year beginning with projects "the construction of which begins" before January 1, 2018. Effectively, projects that begin construction in 2017 will receive only 80% of the PTC, projects that begin construction in 2018 will only receive 60% of the PTC, and projects that begin construction in 2019 will only receive 40% of the PTC. Under IRS Notice 2016-31, wind farms could meet the "begun construction" requirement two different ways: 1) a continuous program of physical construction test (i.e. physical work of a significant nature), or 2) incurring 5% of total project costs and making continuous efforts to advance towards completion of the facility. The Notice also provided a "continuity safe harbor," which stated that a taxpayer satisfies the continuous efforts portion of the 5% test (and the continuous program of construction test) if the project was placed in service by December 31, 2020. Under the House Bill, it appears that taxpayers can no longer begin construction of PTC projects by incurring 5% of project costs and can no longer avail themselves of the continuity safe harbor. This would significantly affect taxpayers that are planning PTC projects. For example, a taxpayer that began construction on a PTC project in 2016 and incurred 5% of project costs (but did not maintain a program of continuous construction) could expect the project to qualify under current law for 100% of the PTC. Under the House Bill, that project would need to start physical construction by the end of the year and continue until the project is complete to secure only 80% of the PTC. |
Investment tax credit (ITC) Section 48(a) currently provides an ITC equal to 30% of the cost basis of qualifying solar energy property for both residential and commercial property placed in service before January 1, 2017. After that date, the percentage of cost eligible for the credit reduces until 2022, after which a permanent 10% credit applies. The full 30% credit previously applied to other technologies (so-called orphan technologies, such as: fiber-optic solar energy, geothermal energy, qualified fuel cell, qualified microturbine, combined heat and power system, qualified small wind energy and thermal energy properties) until the end of 2016. | | House Bill | Chairman's Mark | Provision | — Would extend the ITC for orphan technologies through 2022, subject to the same the phase-out schedules currently provided for solar energy property. — Would extend, through 2022, the ITC for residential solar property, subject to the existing phase-out schedule. — Would apply the same continuous-program-of-construction requirement for beginning of construction to the ITC as proposed for the PTC. — Would eliminate the permanent 10% ITC for solar after 2027. | No change to current law. | Implications | The House Bill would level the playing field between the previously expired ITC for "orphan technology" and the ITC for solar property by subjecting them to same expiration dates and phase-out schedules. Considering the ITC for orphan technologies has been expired for a while, the reinstatement would be a welcome change. |
Final thoughts The House Bill and the Senate Finance Committee Plan differ significantly on credits and incentives. In fact, the only provision that is the same for both is the repeal of the deduction for unused tax credits, a provision we rarely see applied in practice. The Senate Finance Committee Plan not only retains a number of key credit programs like the WOTC, NMTC, PTC, and ITC, but it leaves them unchanged. ——————————————— Contact Information
For additional information concerning this Alert, please contact:
| Tax Credit Investment Advisory Services Group | | • Mike Bernier | (617) 859-6022 | | • Paul Naumoff | (614) 232-7142 | | • Dorian Hunt | (617) 375-2448 |
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