Corporate Law

by Stephen F. Aton

The federal Historic Preservation Tax Incentives Program, administered jointly by the National Park Service and the Internal Revenue Service, provides significant federal tax credits to investors revitalizing communities and historic places.

Begun in 1976, more than 27,000 historic properties have been preserved through the program. The state of Missouri, like many other states, offers its own state tax incentives to encourage our communities to preserve, rather than tear down, the buildings that make them unique.

Federal tax incentives under the Tax Reform Act of 1986, as contained in section 47 of the Internal Revenue Code, provide:

?20 percent tax credit for the certified rehabilitation of certified historic structures; and

?10 percent tax credit for the rehabilitation of non-historic, non-residential buildings built before 1936.

The words "certified rehabilitation" of "certified historic structures" are terms of art. In order to qualify for the 20 percent credit, the structure must be "certified historic," and the rehabilitation envisioned by the investor must be "certified" as well.

For a building to be a "certified historic structure" it must either be listed on the National Registry of Historic Places, or be located within a registered historic district and certified by the National Park Service as contributing to the historic district. The term "structure" means a building, as opposed to a bridge, ship or railroad car.

Assuming a structure meets the tests for being a certified historic structure, the rehabilitation must be certified, as well. The National Park Service must approve the rehabilitation as being consistent with the historic character of the property or the historic district in which it is located.

There is a further requirement that the rehabilitation be "substantial," which is defined to mean an expenditure which is the greater of $5,000, or the basis of the property less the value of the land, improvements made and depreciation already taken. The building must also be used in a trade or a business.

The 20 percent tax credit is significant. A tax credit is much more beneficial than a tax deduction, which merely reduces the amount of income that is subject to taxation. A credit, however, is a dollar-for-dollar decrease in the amount of tax assessed against a taxpayer. A $10,000 tax credit reduces the taxpayer's tax bill by $10,000.

If the taxpayer does not owe that much in taxes, the credit may be carried back or carried forward to subsequent tax years. The credit is usually available beginning in the year the building is put in service, unless a "substantial rehabilitation" test has been met.

The owner of the building must hold the rehabilitated project for a term of 5 years, or the credit is subject to recapture on a balance that declines 20 percent per year. Thus, if an owner sold a building within one year of its being placed in service, all credit would be forfeited. If sold before the expiration of two years, 80 percent of the applicable credit would be forfeited.

A new Missouri law established a state program whereby qualified properties receive a 25 percent tax credit of the total cost and expenses of rehabilitating a historic property, subject to meeting certain guidelines. Technical rules apply to both the state and federal law, but if your property qualifies, tax benefits are available.

(Stephen F. Aton is a Springfield attorney practicing in the areas of corporate law and taxation, and estate planning.)

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