Last month, U.S. Senate Energy and Public Works Committee Chairman Shelley Moore Capito (R-WV) and U.S. Senator Mark Warner (D-VA) have reintroduced the bipartisan Rural Historic Tax Credit Preservation Act (S. 631). At a time when Congress is actively debating the scope of revenue reductions to be set forth in budget reconciliation instructions, and how to renew and modernize the Tax Cuts and Jobs Act (TCJA), the bill heralds strong support for the historic tax credit and associated projects.
Chairman Capito’s press summarizes the policy goals of the legislation:
“The Act streamlines processes, reduces cost-burdens to rural homeowners and small developers, and provides affordable housing incentives for historic tax credit-eligible projects.”
A Bigger, Stronger Credit for Smaller Markets
The bill would generally increase the federal historic tax credit from 20 percent to 30 percent of qualified rehabilitation expenditures for rural projects. The increase would go to 40 percent if the rural project includes an affordable housing component. Also, the bill would permit transfer of the credit to a third-party and eliminate basis adjustment to simplify a credit transaction. Qualified rehabilitation expenditures under the bill would be limited to $5 million. At the maximum $5 million QRE, the tax credit at 30 percent would be $1.5 million, while at 40 percent it would be $2 million.
The bill would also allow developers of applicable rural projects to claim the credit in the taxable year in which the project is placed in service. This approach would accelerate the timeline for monetizing the credit from the five-year timeline under TCJA and provide an additional benefit to pursuing smaller, rural projects. Accelerating the monetization period to one year would effectively increase the delta between the percentage credit for eligible rural projects versus ineligible projects due to the time value of money.
What Is a Rural Area?
A rural project under the bill is generally defined as a qualified rehabilitated historic building in a rural area. For purposes of this bill, a rural area is defined as any area that is not in a city or town with more than 50,000 residents, or the urbanized area contiguous and adjacent to such city or town.
Affordable Housing Component
To satisfy affordable housing requirements and receive the 40 percent credit, affordable housing (as defined in 42 U.S.C. 1437(f)) must generally comprise at least one-third of the aggregate square footage of the project if the project does not include market-rate housing. If the project does include market rate housing, at least 50 percent of the aggregate square feet of the project would need to include housing, and at least 50 percent of that total residential space within the project must comprise affordable housing.
Certified Historic Structures
To qualify for credits under the bill, a building must be either individually listed on the National Register of Historic Places or listed as a contributing building in a local, state or National Register historic district certified by the Secretary of the Interior. State historic preservation offices (SHPOs) work in conjunction with the National Park Service to administer historic certifications.
Economic and Other Benefits
Ostensibly, the bill would provide an additional boost to projects in county seat and smaller markets by increasing the financial incentive to complete projects which in turn should increase activity. Also, the bill should boost economic benefits to rural economies more historic projects are completed. Aside from positive environmental and community development impacts, numerous studies at local, state or national levels have documented the multifold economic return to communities from historic rehabilitation or preservation projects.
Next Steps and Considerations in the Legislative Process
As the Ways and Means Committee considers the next steps to reform and improve the tax code, a key factor governing the Committee’s ability to reduce revenues will be the Senate reconciliation instructions. For example, the section 2001(b)(11) of the House Budget Resolution passed in February included reconciliation instructions for the Committee on Ways and Means under increase the deficit (by reducing revenues) by $4,500,000 over the FY 2025-2034 period, but the amount of total tax cuts that can be included in reconciliation was contingent on spending cuts of at least $2.0 trillion. Under this Budget resolution, if Congressional Committees fail to achieve $2.0 trillion in spending cuts, the total amount of possible revenue reductions is decreased dollar for dollar (though the minimum spending reductions required total $1.5 trillion under the House bill). The Senate has not yet adopted the House Budget Resolution’s recommendations, and the total spending revenue reductions that will govern the ability to consider S. 631 in a tax reform package are still under negotiation.
Commonly used in conjunction with state programs and other incentives frequently used by developers for historic rehabilitation projects, the federal historic tax credit is a key incentive for economic growth nationally, but especially in Ohio. For more information on how KJK can help complete the capital stack for a historic renovation project in Ohio, or clarifications on S. 631, please contact Rich Morehouse (RAM@kjk.com) or Charlie Bolton (CHB@kjk.com).
