Rehabilitation Tax Credits for Historic Buildings and Tax Benefit Programs
Since 1976, federal law has provided tax incentives for historic preservation. As of Jan. 1,1998, a state rehabilitation tax credit incentive is available as well. The availability of the federal and state tax credits is a major plus for encouraging investment in historic resources– in urban cores, residential neighborhoods and small towns throughout the state. According to the National Park Service's FY2004 annual report on tax incentives, the success of Missouri's historic rehab tax credit program "is reflected in the fact that rehabilitation using the federal tax credits doubled" after the introduction of the state tax credits. The report pointed out not only that Missouri's ranking demonstrates the impact of the existence of the state tax credit on the use of the federal tax credits, but also that it is this winning combination that has enticed developers from other states to join local developers in hiring workers to rehab historic buildings in communities across Missouri! When the FY2005 report came out, Missouri once again ranked FIRST in the nation
In the most recent report (FY2006), Missouri ranked FIRST in the number of projects receiving preliminary approval, SECOND in dollars invested in projects receiving final approval, and THIRD in the number of projects receiving final approval. A Rutgers University study reveals that the impact of historic preservation tax credits on Missouri's economy extends far beyond the initial investment in buildings and communities. The preservation of Missouri's historic architecture is a major driver for heritage tourism in the state and a major source of new jobs and additional revenue for municipalities, counties, and the state itself. The Department of Natural Resources’ State Historic Preservation Office (SHPO) works actively with property owners, developers and architects to promote the incentives and provide advice on appropriate rehabilitation. SHPO staff review applications for tax certification and make recommendations for approval. Below is a summary of the application and review process for state and federal historic rehab tax credit projects. The historic rehab tax credit "grid" PDF, a shorter sketch of the similarities and differences between the two programs, is also available.
Missouri law provides an investment tax credit equal to 25 percent of approved costs associated with qualified rehabilitation made after Jan. 1, 1998. Homeowners as well as commercial developers can qualify for the state credit. The state credits are administered by the Community Development Division in the Missouri Department of Economic Development. The State Historic Preservation Office is responsible for reviewing and approving rehabilitation work for the state credits. The federal and state credits can be used in combination for the rehabilitation of commercial or income-producing properties. Rehabilitation of non-income producing residential properties qualifies for the state credits only. A tax credit lowers the tax owed. A tax credit differs from a tax deduction in that income tax deduction lowers the amount of income subject to taxation while a dollar of tax credits reduces the income tax owed by one dollar.
The federal credits are limited to income-producing, depreciable property only. The property may be either commercial or residential rental property. A taxpayer’s personal residence would not qualify for the federal credit. The state credits also apply to income-producing property including either commercial or residential rental property. Additionally, a taxpayer’s personal residence can qualify for the state credit if the property is historic and if the minimum investment threshold is met.
Note that the federal credits use the "adjusted basis" while the state credits use the "basis" for determining if the threshold has been met. "Basis" is the cost, or fair market value, of the property at the time of acquisition, or as otherwise defined in the U.S. Internal Revenue Code. The "adjusted basis" of a building is essentially the current book value of the building. It is determined by taking the purchase price of the building and subtracting the value of the land (which does not depreciate). Any previously claimed depreciation is subtracted from this figure and the value of any improvements made up to the beginning of the 24-month test period defined by the applicant is added to the figure. For a taxpayer seeking both federal and state credits, it is possible that the project might meet one but not the other of the threshold requirements.
For the state credits, total costs incurred on rehabilitation shall include but not be limited to qualified rehabilitation expenditures as defined under section 47(c)(2)(A) of the Internal Revenue Code of 1986, as amended. Acquisition costs, furnishing costs, new additions that expand the building, new building construction, parking lots, sidewalks and landscaping are not allowed under the federal and state programs.
Copies of the Secretary of the Interior’s Standards are included in both the federal and state tax credit application packets. Additional information on the standards can be obtained by contacting the Historic Preservation Program or the National Park Service or by following these links:
Owners may submit their state tax project for review prior to a property being listed in the National Register. State credits will not be awarded, however, until the property is formally listed in the register. An owner may begin rehabilitation work prior to a property being listed, but they do so at their own risk.
To obtain the state credits, the taxpayer submits to the Department of Economic Development the Part 1B of the state application outlining the proposed rehabilitation work. To ensure that the proposed work meets the Secretary of the Interior’s Standards, the State Historic Preservation Office in the Department of Natural Resources reviews the application.
There are no recapture provisions for the state credits.
After the State Historic Preservation Office reviews Part 3, it is forwarded to the National Park Service. The National Park Service issues the final certification, which is filed with the taxpayer’s federal income tax return. To obtain the state credit, the applicant submits Part 1a and 1b to the Department of Economic Development prior to the start of a project. Once the project has been approved and work is completed, the applicant submits a Part 2. The Department of Economic Development will provide the taxpayer with the documentation to be submitted with the taxpayer’s state income tax return. It is recommended that an owner seeking BOTH federal and state credits apply to obtain the federal credits first. Once a project has been reviewed and approved at the federal level, no subsequent state review of the scope of work is required.
Generally, the state tax credits are claimed on Missouri form MO-TC for the year in which the rehabilitated building is placed in service.
The period for review of projects seeking only the state credit is 30 working days. This permits time for initial processing at the Department of Economic Development, review of proposed work by the State Historic Preservation Office and final processing by the Department of Economic Development for final processing. If a project is seeking both credits and has been approved at the federal level, this time frame will be significantly reduced. These time frames assume that all adequate information has been supplied in the application. Should it be necessary to request clarification or additional information from the applicant, the clock would stop at that point and be started again once adequate information is supplied for review.
State law permits distribution of credits to investors based on a pro-rata basis or an executed agreement among the investors. Effective Aug. 28, 1998, state credits can be sold. Involvement by not-for-profits in the sale of state credits is not allowed. It is recommended that the advice of a qualified tax professional be sought before proceeding with any project involving multiple investors!
Apply as soon as possible--preferably BEFORE beginning work. Consult with the State Historic Preservation Office for the federal credits or the Department of Economic Development for the state credits as soon as you can. Read the program applications thoroughly and follow instructions carefully. Photograph your building inside and out BEFORE beginning work. Before photographs are especially important. Without them, it may be impossible to review a project. A photo-documentation instruction sheet is included in the guidelines for the state tax credit. Read and follow the "Secretary of the Interior’s Standards for Rehabilitation." Consult with the State Historic Preservation Office for information on interpreting the standards. Seek the advice of a qualified tax professional before proceeding with any tax credit rehabilitation project! Helpful Links:
Tax Benefit ProgramsMissouri State Historic Tax CreditThe Missouri State Historic Tax Credit provides an incentive for the redevelopment of commercial and residential historic structures. The tax credit is equal to 25% of the eligible costs and expenses of renovation. The tax credit may be used to offset Missouri income tax liability. The credits may be used in the year provided, may be carried back 3 years or carried forward 10 years. Tax credits may be used by individuals, corporations, or partnerships and may also be sold or exchanged. Applications are available by contacting the Missouri Department of Economic Development. In order to be eligible for the Missouri State Historic Tax Credit, a structure must be listed individually on the National Register of Historic Places, be considered a contributing structure in a National Register historic district, or be located in a local historic district certified by the United States Department of the Interior. Renovation must be equal to or greater than 50% of the total basis of the property (acquisition cost). All plans for renovation must be approved by the Missouri State Historic Preservation Office to ensure compliance with standards for historic preservation. Real Estate Tax Abatement Real Estate Tax Abatement is an incentive program to assist developers and businesses with renovation and new construction projects. The Alderman of the ward in which development is proposed is a key to the tax abatement process. Tax Abatement can be provided anywhere in the City after an Ordinance is approved. Some areas are pre-approved (i.e. Enterprise Zone). Tax Abatement freezes Tax Assessment of new improvements at the pre-development level. The usual term for a Commercial/Industrial Project is a 10 year full abatement. The City has by statute the ability to provide up to 25 years of abatement (10 year full + 15 year abatement at 50%). However, application for abatement greater than 10 years generally must show extraordinary cost, development obstacle, or extraordinary impact. The time frame for approval is 90 days. Company constructs new building on raw land - for a 10 year period tax bill is based on land assessment only. Company buys building for $100,000 and spends another $100,000 in improvements - for a 10 year period company is taxed on the pre-development assessment of building and land. Tax Increment Financing Tax Increment Financing is a development tool designed to help finance certain eligible improvements to property in designated redevelopment areas (TIF districts) by utilizing the new, or incremental, tax revenues generated by the project after completion. Under TIF, property taxes within the TIF District are frozen for up to 23 years, the property owners then make Payments In Lieu of Taxes (PILOTS) to a "special allocation fund". Additionally, 50% of any new local Economic Activity Taxes (EATS), i.e. local sales taxes, earnings taxes, utility taxes, generated from the project are also paid to the fund while the District is in effect. The proceeds of the fund are then used to reimburse the developer for eligible project costs or to retire indebtedness incurred to cover those costs. Eligible project costs are the total of all reasonable or necessary costs incurred, or estimated to be incurred and any costs incidental to a redevelopment plan or project. Specifically, these costs include, but are not limited to:
In addition to the PILOTS and local EATS, TIF plans adopted after January 1, 1998 and located in an Enterprise Zone, Federal Empowerment Zone, or the Central Business District, can also use 50% of the "New State Revenues" generated from the project. The New State Revenues are the incremental increase in either state sales taxes resulting from the project or state income taxes withheld on behalf of the new employees in the district. The process to apply for and gain approval of Tax increment Financing takes four to six months and requires legislation by the City’s Board of Alderman. To begin the process, an application and additional information packet can be obtained by contacting Dale Ruthsatz, Director of Commercial Development. Enterprise Zone Tax IncentivesEnterprise Zone Tax Incentives are targeted geographically and include the State Enterprise Zone area and the Federal Enterprise Community Area (see attached map). State incentives include credits and exemptions from State Corporate Tax. The threshold to qualify for benefits is the creation of at least 2 new jobs and a capital investment of at least $100,000. State incentives include: job credits, investment tax credits, and a 50% exemption. Not all businesses are eligible to receive Enterprise Zone Tax Benefits. Those businesses targeted by this State program include:
JOB CREDITS A qualifying business (those companies meeting the criteria of job creation and capital investment) are eligible for at least a $400 per employee tax credit for each new hire or employer relocated to the zone facility from out of state. That benefit is doubled to $800 per employee if the new hire is either a zone resident or a displaced worker (unemployed prior to accepting the job) and triples to $1,200 if the new hire is both a resident of the zone and a displaced worker. The job credit has the ability to last up to 10 years. Assistance beyond the job credit must be earned by the company by proactively hiring. In order to receive benefits from Enterprise Zone Investment Tax Credit and 50% exemption; a company must achieve 30% of their new hires from the pool of Enterprise Zone residents and displaced workers. Any existing employee of the company residing in the Enterprise Zone can count toward the 30% requirement. INVESTMENT TAX CREDIT A 10 year credit computed based upon a formula which provides 10% of the first $10,000 in capital investment, 5% of the next $90,000 and 2% on investments in excess of $100,000. A new lease is calculated at 8 times the annual lease payment for the purposes of a calculating capital investment. Note that the State requires the new investment calculation to deduct the value of the former facility in determining investment. For example: A company sells a building with a value of $100,000 and replaces the facility with a building in the Enterprise Zone valued at $200,000. So, total value of the new investment minus the value of the replaced facility would mean an investment of $100,000 for Enterprise Zone purposes. 50% EXEMPTION Companies making qualified investments also qualify for a 50% exemption from state corporate income tax on the revenue growth of an existing business, or a total 50% exemption for a business new to the State of Missouri.
Example A company making a qualified zone investment has revenues increase from one million to two million. If the company has only one location it will receive a 50% exemption from state corporate income tax on the one million in incremental growth. For companies with multiple locations (some outside the zone) making a qualified zone investment, the formula to determine their benefit is as follows; Compensation For New Zone Jobs X Missouri Taxable Business Income X 50% Total Missouri CompensationCredits are claimed through the annual state corporate tax filing. The program is attractive to larger companies with significant state tax liabilities, but also is applicable to small companies, even those that are not currently profitable, because the state will buy back (refund) unused credits up to $75,000 over the first three years. Effective January 1, 1999 the State requires companies anticipating using Enterprise Zone benefits to file a letter of intent with the State 15 days prior to commencing operations at the expanded or allocated facility. PERSONAL PROPERTY TAX INCENTIVE Effective August 28, 1998 the State of Missouri authorized a new sub-class of personal property --pollution control tool/equipment, and tools/equipment for re-tooling or upgrading products of eligible companies located in an Enterprise Zone -- to be assessed at 25% (rather than 33%) of their value for personal Rebuilding Communities Tax IncentivesEffective January 1, 1999 the State of Missouri has enacted new incentive legislation, the Rebuilding Communities Tax Act which provides State Tax Incentives for certain types of businesses which relocate or invest in a designated "Rebuilding Community." The entire City of St. Louis has been designated as eligible for this program incentive. Eligible Business Eligible businesses include corporations, partnerships, and proprietors with fewer than 100 employees. 75% of the companies’ employees must be located in or relocating to the City of St. Louis. Types of business operations eligible to receive Rebuilding Communities Tax Credits are:
PROGRAM BENEFITS The program provides tax credits to eligible companies which relocate to the designated Rebuilding Community, or those eligible businesses already in the designated community making specialized equipment purchases, specifically a new or relocating company receives either:
Additionally, the individual employees of the eligible business facility may receive a tax credit against State Income Tax equal to 1.5% of their gross salary paid at the facility for each of the three years that the facility (the company) receives the tax credit. An eligible existing (already located in designated community) business can qualify for:
Note: If a qualifying existing company anticipates doubling their existing employment within one year the State will allow the expansion to qualify for the same benefits afforded to a relocating company. USE OF CREDITS: Business credits may be used for taxes owed in 3 previous years and in any of the 5 tax years thereafter. These credits may be transferred, sold or assigned. These tax credits must be approved by application to the Missouri Department of Economic Development prior to the relocation or expenditures.
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