About Federal Tax Credits

The Federal Historic Rehabilitation Tax Credit (HTC) encourages the preservation and reuse of the nation’s built infrastructure by offering federal tax credits to the owners of historic properties. The tax credits represent a dollar-for-dollar reduction of federal taxes owed. Since its inception in 1976, the credit has encouraged the rehabilitation of more than 31,000 historic properties representing over $31 billion in private investment. This approach to community revitalization has been so successful that nearly half the states now have similar programs.

Certified historic structures are eligible for a credit equal to 20 percent of the cost of rehabilitation. Properties built before 1936 that are not eligible for individual listing on the National Register of Historic Places, nor eligible for inclusion in a certified historic district (considered non historic, non-contributing structures) are eligible for a credit equal to 10 percent of the cost of rehabilitation.

The New Markets Tax Credit (NMTC) is a 39 percent credit on an equity investment to a Community Development Entity (CDE) that is claimed over a 7-year compliance period (5 percent over the first 3 years and 6 percent over the last 4 years). The CDE must then make a Qualified Equity Investment or loan to a Qualified Business in a Qualified Low-Income Community (LICs). Most Commercial and mixed-use real estate development projects located in LICs are Qualified Businesses. (Residential projects without a commercial component do not qualify.) The New Markets program is designed to encourage investments in LICs that traditionally have had poor access to debt and equity capital.

The New Markets Tax Credit and the historic tax credit are natural allies. LICs are defined as U.S. census tracts with a 20 percent poverty rate or household incomes at or below 80 percent of the area or statewide median, whichever is greater. Due to this liberal definition, 40 percent of all U.S. and most central business district census tracts qualify for the NMTCs. Because most old buildings are found in disinvested parts of any city or town, and most rehab tax credit projects are located in central business districts, in 2005 68 percent of all HTC Part 3 approvals were granted for properties in qualified NMTC census tracts.

Unlike the Federal HTC’s, the annual dollar volume of NMTC’s allocated by the U.S. government is capped. That means that CDEs must compete against each other to receive an allocation of New Markets Credits during each annual funding round. Once a CDE wins an allocation, it partners with an investor who is attracted by the tax benefits offered by the New Markets Tax Credit. In order to claim the credit, the investor must make an equity investment in a CDE.

Investment Tax Credit (ITC)

The federal energy investment tax credit (ITC) program, authorized under 26 USC 48 (section 48), encourages the use of renewable energy, including solar energy property, that generates electricity, illumination, or solar process heat.1 The energy ITC program reduces federal income taxes by offering a 30 percent tax credit to owners or long-term lessees for qualified property that meets established performance and quality standards. It is equal to a percentage of the project’s qualified capital expenditure, and is not linked to production. To make use of the ITC, solar projects have to be placed in service by January 1st 2017. Solar energy projects also qualify for MACRS (Modified Accelerated Cost Recovery System) depreciation. MACRS depreciation allows tangible property to be depreciated on an accelerated basis according to a detailed schedule specified by the Internal Revenue Service (IRS). Wind, solar and geothermal projects, for example, are classified as five-year property and depreciated at a set rate over the course of six years.

Production Tax Credit (PTC)

The PTC is an income tax credit of a specified cent/kilowatt-hour allowed for the production of electricity from utility-scale wind turbines and geothermal plants. This incentive, the renewable energy Production Tax Credit (PTC), was created under the Energy Policy Act of 1992 (at the value of 1.5 cents/kilowatt-hour, which has since been adjusted annually for inflation).

Commencing in 1986, investors in low-income housing projects were afforded federal tax credits which could be used to offset the investor’s federal income tax liability on a dollar for dollar basis. This incentive has induced many tax payers to invest in low-income housing projects, which provides a source of funds necessary to make such projects viable. In 2009, each state allocated $2.30 of tax credits per capita or approximately $5 billion in annual allocation.

Low-income housing projects yield a federal low-income housing tax credit by virtue of either (i) receipt of an al location of low-income housing tax credits from a state designated agency; or (ii) the funding of projects through tax-exempt bonds. Allocations are awarded to projects by state designated agencies based on criteria that generally include (i) project location, (ii) time period that the project is required to remain a low-income housing project, (iii) tenant population and special housing needs, and (iv) project viability.