In proposed regulations (REG-124327-19), the IRS explains that the rehabilitation credits for historic buildings under IRC Section 47, as modified by the Tax Cuts and Jobs Act (TCJA), must be allocated ratably over five years, beginning in the tax year the building was placed into service.

Comments on the proposed regulations may be submitted in written or electronic (preferred) form within 60 days of the May 22, 2020 publication in the Federal Register (July 21, 2020).

Credit for pre-1936 buildings repealed, credits for historic structures modified

Former IRC Section 47(a) established a two-tier credit for qualified rehabilitation expenditures (QREs) incurred in rehabilitating a qualified rehabilitated building (QRB). The credit was fully allowed in the tax year the QRB was placed in service. The former credit amounts were 20% for QREs for a certified historic structure and 10% for QREs for a QRB first placed in service before 1936.

The TCJA repealed the 10% credit for pre-1936 QRBs and modified the rules for claiming the 20% credit for historic structures. Under the post-TCJA rules, the 20% credit must be claimed ratably over five years, beginning in the tax year in which the QRB was placed in service.

The post-TCJA rules apply to QREs paid or incurred after December 31, 2017, except if: (1) the taxpayer owned or leased the building on January 1, 2018, and continues to own or lease the building after that date, and (2) the 24- or 60-month period selected by the taxpayer for phased rehabilitation begins by June 20, 2018. The pre-TJCA credit structure still applies to QREs that fall under these conditions.

New rules clarified

According to the regulations' Preamble, practitioners have been asking whether the rehabilitation credit under the post-TCJA rule is determined in the year the QRB is placed in service and allocated ratably over five years, or whether five separate rehabilitation credits are determined during each year of the five-year period. The proposed regulations clarify that "the rehabilitation credit is properly determined in the year the QRB is placed in service (consistent with prior law) but allocated ratably over the [five]-year period as required by the TCJA, rather than resulting in the determination of five separate rehabilitation credits."

The proposed regulations follow this same pre-TCJA approach for determining a single rehabilitation credit in applying the IRC Section 50 rules relating to recapture, basis adjustment and leased property. As a result, claiming the rehabilitation credit under IRC Section 47 for QREs paid or incurred after December 31, 2017, generally will have the same federal income tax consequences as the rules under IRC Section 50.

Details in Prop. Reg. Section 1.47-7

The proposed regulations would add Prop. Reg. Section 1.47-7(a) through (e).

Prop. Reg. Section 147-7(a): For purposes of the investment credit under IRC Section 46, the rehabilitation credit for the year would be the ratable share for any tax year during the five-year period.

Prop. Reg. Section 147-7(b): A "ratable share" is 20% of the "rehabilitation credit determined" for the QRB, as allocated ratably to each tax year during the five-year credit period.

Prop. Reg. Section 147-7(c): The "rehabilitation credit determined" is 20% of the QREs under IRC Section 47(b)(1) for the tax year in which the QRB is placed in service. If the taxpayer claims the additional first year depreciation for the QREs under Treas. Reg. Section 1.168(k)-2(g)(9), however, the "rehabilitation credit determined" is 20% of the remaining rehabilitated basis of the QRB for the tax year in which the QRB is placed in service.

Prop. Reg. Section 147-7(d): The rehabilitation credit for the purpose of IRC Section 50 is determined in the same manner as for IRC Section 47.

Prop. Reg. Section 147-7(e): This regulation contains examples illustrating the interaction of IRC Section 47 with rules in IRC Section 50(a) (recapture in case of dispositions), IRC Section 50(c) (basis adjustment to investment credit property) and IRC Section 50(d)(5) (relating to certain leased property when the lessee is treated as owner and subject to an income-inclusion requirement).

Implications

The proposed regulations give wanted clarification as to how the changes implemented by TCJA are effectuated. The results of the proposed regulations largely align with the general industry practice around these issues. The examples were very helpful in illustrating the rules and provided additional clarity.

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