1999 Tax Law Changes - Historic Rehabilitation Tax Credits

X. HISTORIC REHABILITATION TAX CREDITS

Article 3B

New Article 3D - Historic Rehabilitation Tax Credits: This new Article was enacted to place the corporation income tax and individual income tax credits for rehabilitating historic structures into one common Article. G.S. 105-130.42 in the corporation income tax laws and G.S. 105-151.23 in the individual income tax laws are repealed and recodified as part of new Article 3D.
(Effective for taxable years beginning on or after January 1, 1999; SB 251, S.L. 99-389.)

G.S. 105-129.35 - Rehabilitating Income-Producing Historic Structure: This new statute consolidates the existing corporation and individual income tax credits for rehabilitating income-producing historic structures and allows owners of pass-through entities an option on how to allocate the credit among the owners. Subsection (a) sets out the credit, which is recodified from G.S. 105-130.42(a) and G.S. 105-151.23(a).
Subsection (b) contains the new provision concerning pass-through entities. It allows a pass-through entity that qualifies for the credit to allocate the credit among any of its owners in its discretion as long as the amount of credit allocated to an owner does not exceed the owner's adjusted basis in the pass-through entity at the end of the taxable year in which the rehabilitated structure is placed in service. This differs from the allocation principles in G.S. 105-269.15 that apply to all other tax credits. Under the general allocation provisions, tax credits are allocated among S corporation shareholders in accordance with their pro rata share of the corporation, which is determined on the basis of stock ownership, and tax credits are allocated among partners in a partnership in accordance with the partnership agreement. The allocation made by the partnership must have a substantial economic effect, which means that the allocation agreement must reflect the economic interests of the partners in the partnership and cannot be based solely on tax consequences. A statement of the allocation made under the special provision for this credit and the allocation that would have been required if this provision were not law must be included with the tax returns filed by the pass-through entity and the owners for each year in which the allocated credit is claimed.
Subsection (c) sets out definitions of "certified historic structure," "pass-through entity," and "qualified rehabilitation expenditures." The definition of "certified historic structure" is changed from a repetition of that definition in Section 47 of the Internal Revenue Code to a cross-reference to that section. The definition of "pass-through entity" is new. The definition of "qualified rehabilitation expenditures" is changed to a cross reference to Section 47 of the Code. Previously the term "rehabilitation expenditures" repeated the definition in that section of the Code.
(Effective for taxable years beginning on or after January 1, 1999; SB 251, S.L. 99-389.)

G.S. 105-129.36 - Rehabilitating Nonincome-Producing Historic Structure: This new statute consolidates the existing corporation and individual income tax credits for rehabilitating a nonincome-producing historic structure. Subsection (a) sets out the credit, which is recodified from G.S. 105-130.42(b) and G.S. 105-151.23(b). The consolidated credit does not change the substance of the prior credits for nonincome-producing property. As under current law, the historic structure for which this credit is claimed must be State-certified. Subsection (b) sets out the applicable definitions, which are the same in substance as the prior law. Subsection (c) preserves the authority previously contained in the definition of "certified rehabilitation" for the North Carolina Historical Commission, in consultation with the State Historic Preservation Officer, to adopt rules needed to administer the certification process.
(Effective for taxable years beginning on or after January 1, 1999; SB 251, S.L. 99-389.)

G.S. 105-129.37 - Credit Restrictions: This statutes specifies the tax against which this credit can be claimed and the limitations on the credit. The provisions of this section consist of the provisions in repealed G.S. 105-130.42(c) and G.S. 105-151.23(c) plus new provisions on forfeiture of the credit for rehabilitating income-producing property. Subsection (a) provides that the credit is allowed only against the income tax imposed by Article 4 of Chapter 105. Subsection (b) limits the credit to the amount of income tax against which it is claimed. Any unused credit may be carried forward for five years.
Subsection (c) requires a taxpayer to forfeit a portion of the credit for rehabilitating an income-producing historic structure if the taxpayer is required to recapture a portion of the corresponding federal credit because the taxpayer disposed of the rehabilitated property within five years of placing the property in service. Subsection (d) requires an owner of a pass-through entity to forfeit a portion of the credit for rehabilitating an income-producing historic structure if the owner disposes of more than one-third of the owner's interest in the pass-through entity within five years from the date the rehabilitated property is placed in service. The forfeiture amount is 100% if the ownership interest is reduced in the first year and decreases by 20% each year thereafter. The remaining allowable credit is allocated equally among the five years in which the credit is claimed.
Subsection (e) provides two exceptions to the requirement to forfeit a portion of the credit for change in ownership. The credit is not forfeited if the change in ownership is the result of either the death of the owner or a merger, consolidation, or similar transaction.
Subsection (f) provides that a taxpayer or an owner of a pass-through entity that forfeits a credit is liable for all past taxes avoided as a result of the credit plus interest. Taxes and interest due as a result of forfeiture are due 30 days after the date the credit is forfeited. A taxpayer or an owner of a pass-through entity that fails to pay the taxes and interest by the due date is subject to the penalties in G.S. 105-236.
(Effective for taxable years beginning on or after January 1, 1999; G.S. 105-129.35(b), which provides for allocation among the owners of a pass-through entity, is repealed effective January 1, 2002, for property placed in service on or after that date; SB 251, S.L. 99-389.)