Are you curious about how historic tax credits are calculated? Historic tax credits (HTCs) are a great way to save money on taxes, but it can be difficult to understand the process. At Creative Advising, our certified public accountants, tax strategists, and professional bookkeepers are here to help you understand the complexities of HTCs.
We are committed to providing the most up-to-date and accurate information, so you can make the best decisions for your business. In this article, we will explain the basics of how HTCs are calculated, so you can take advantage of the financial benefits.
We will discuss the importance of understanding the rules and regulations of HTCs, the different types of credits, and how to calculate the amount of credits you can receive. We will also provide helpful tips on how to maximize your savings.
At Creative Advising, we understand that tax laws can be confusing and overwhelming. That is why our team of professionals is here to help you navigate the complexities of HTCs. With our expertise, you can rest assured that you are taking full advantage of the financial benefits available to you.
Ready to learn more? Let’s dive into how historic tax credits are calculated.
Qualifying Expenditures for Historic Tax Credits
The Historic Tax Credit (HTC) program offers incentives for property owners to rehabilitate historic buildings. The tax credit amount is based on qualifying expenditures that are incurred during the rehabilitation of a historic property. Qualifying expenditures consist of the costs of tangible property used in the rehabilitation of a historic property. This includes materials used in the construction of the property and labor costs associated with the rehabilitation.
In order to be eligible for the HTC, the costs of the rehabilitation must be used for a qualified purpose, such as repairs, renovations, or restorations of the original building. Qualifying expenditure of other ancillary improvements such as new plumbing, electrical systems, or landscaping may also qualify for a portion of the credit amount. Generally, improvements on the property that can be attributed to a new structure and those that increase the value of the property do not qualify for the credit.
In addition to the qualifying expenditure of the rehabilitation of the property, the Preservation Advisory Committee must evaluate the rehabilitation project in terms of its impact on the historic character of the site. The amount of credits available for any given project may vary depending on the characteristics of the property, such as its age, location, or architectural significance.
How are Historic Tax Credits Calculated?
The amount of the Historic Tax Credit available to a property owner is equal to 20% of Qualified Rehabilitation Expenditures (QREs), up to a maximum of $50 million. QREs include costs related to the rehabilitation such as labor, materials, fixtures, and professional services fees. Generally, only costs directly related to the rehabilitation are eligible for the Historic Tax Credit. Certain projects may be eligible for a 10% tax credit, which is limited to spending up to $3 million.
To calculate the Historic Tax Credit, one must first determine the Qualified Rehabilitation Expenditures (QRE) for a particular project. This amount is determined by calculating the cost of tangible property used in the rehabilitation, such as materials and labor, and also taking into account any professional fees or other costs associated with the project. Once the QRE is determined, the credit amount is calculated as 20% of the total QRE. The maximum credit amount is limited to $50 million.
The Historic Tax Credit can be claimed in both the 12-month period in which the rehabilitation is completed and the following 9-month period. The credit can be used to offset taxes owed by the property owner or to generate a refund of taxes previously paid.
Determining the Cost Basis for Historic Tax Credits
When it comes to Historic Tax Credits, the cost basis of a project is essential in determining the amount of credit. To determine the cost basis, you must add up the cost of acquisition, rehabilitation and reconstruction of the property that qualifies for an Historic Tax Credit. Acquisition is essentially the purchase price, while rehabilitation and reconstruction includes improvements, necessary modifications and repairs needed to make the building or property historically accurate.
Historic Tax Credits are calculated as a percentage of the total qualified rehabilitation costs. This varies depending on the location of the property and how it is being used. A residential property may be eligible for a 20 – 30% deduction, while an income-producing property can qualify for up to a 40% deduction.
When it comes to calculating the actual credit amount, it is important to note that the actual amount of credit received may be less than the deduction percentage noted. For instance, the amount of tax credit awarded may be subject to maximum project limits, or the taxpayer may be limited by the amount of their income or the time period the project was completed. It is important to understand these restrictions in order to maximize the amount of Historic Tax Credit available.
Overall, understanding the cost basis of a Historic Tax Credit project is essential to determine the amount of credit available. Factors such as acquisition cost, the location of the property, and other rehabilitation costs need to be taken into consideration in order to calculate the credit amount available. Additionally, restrictions such as project limits and the taxpayer’s income may affect the amount of the credit that can be taken. It is important to be aware of these regulations in order to receive the maximum Historic Tax Credit available.
Calculating the Credit Amount
The process of calculating the credit amount for Historic Tax Credits (HTCs) is often the most complex aspect of taking full advantage of them. The amount of credit available is different depending on the properties involved; it could range from a 20 percent credit for properties certified as ‘contributing’ to a 10 percent credit for properties that have been ‘non-contributing’ for more than five years.
The following factors should be taken into consideration when calculating the credit amount: the scope and complexity of the project, the extent of rehabilitation work, the amount of additional investment that has been made in the property and any tax credits, deductions and other incentives already available. It’s important to remember that the credit amount is determined not just by the investment made in the property, but also by the total cost of the project, including the associated costs of acquisition, surveys, engineering and legal costs.
In terms of how Historic Tax Credits are calculated, an important concept to understand is the basis reduction. This is when credits are reduced by the amount of depreciation deductions taken on the property, any earlier credits taken, and the extent to which the project was financed using other incentives such as the Low-Income Housing Tax Credit, the Rehabilitation Tax Credit, the New Markets Tax Credit, or other government grants for the project. It is for this reason that calculating the credit amount is a highly complex undertaking, and it is best to have a qualified professional accountant assist in this process.
Limitations on Historic Tax Credits
One of the most important things to take into account when considering applying for a Historic Tax Credit is understanding the limitations that come along with this form of tax credits. Each of the 50 states has different limitations and requirements placed on those applying for a Historic Tax Credit, meaning that it is important to have a good understanding of local and federal rules and regulations. Generally speaking, most states require that historic rehabilitation projects meet certain criteria, such as the use of qualified professional contractors, and must be completed within an approved timeframe.
The most common limitation on Historic Tax Credits is a maximum allowable amount of credits that can be claimed in a single tax year. That amount is determined by the total amount of qualified rehabilitation expenses incurred during the tax year, and usually varies from state to state. Additionally, in many cases, Historic Tax Credit applications may take up to a year or more to be processed by the state or the IRS, so it’s important to be prepared for a potentially long wait can be expected.
How are Historic Tax Credits calculated? Historic Tax Credit calculations vary depending on the state that the credit is being applied for. In most cases, the amount of credit is based on the total cost of the qualified rehabilitation and related expenses incurred in the project, such as professional services and construction. Additionally, certain rehabilitation expenses may qualify for higher maximum credit amounts if they are considered to meet the criteria of being part of a larger, overall project. Be sure to check with the state you are applying in to determine the exact specifics of calculating Historic Tax Credits.
Utilizing Historic Tax Credits to Maximize Savings
Historic Tax Credits are an incredibly powerful tool for real estate investors or businesses looking to maximize their savings. While the tax credits are calculated differently depending on the project and can be limited, this program provides an opportunity to save substantial amounts in the short and long-term.
At Creative Advising, our goal is to utilize historic tax credits to the full extent to maximize savings. To do this, we first review all documentation to check for any qualifying expenditures, and if the project meets the requirements, we begin to calculate the cost basis, which is the amount the project costs and the savings the investor can expect. Once the cost basis is determined, we increase the cost basis to reflect any historic tax credits which may reduce the investor’s tax liability in the long term.
Finally, with the cost basis in mind, we can determine the credit amount an investor can claim when filing their taxes. We also help our clients understand the limitations on the historic tax credits, which range from rehabilitation requirements to investment deadlines. Generally, clients can only claim up to 20% of the total cost of the project as a credit, which is an important factor to consider. But with the right guidance and understanding, taxation can be reduced significantly through the use of historic tax credits.
We know how complex historic tax credits can be, and we always ensure that our clients understand the terms and regulations, so they can take full advantage of the benefits available to them. We take pride in helping our clients maximize their savings and provide bespoke advice tailored to their individual situations. Let us help you maximize your tax savings through historic tax credits.
“The information provided in this article should not be considered as professional tax advice. It is intended for informational purposes only and should not be relied upon as a substitute for consulting with a qualified tax professional or conducting thorough research on the latest tax laws and regulations applicable to your specific circumstances.
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