The IRS has extended deadlines related to rehabilitation tax credits because of delays caused by the coronavirus, but some are questioning whether the relief goes far enough.
New guidance (Notice 2020-58, 2020-34 IRB 1) released July 30 gives some taxpayers until March 31, 2021, to satisfy the section 47 substantial rehabilitation test measuring period and a transition rule on changes made to the credit under the Tax Cuts and Jobs Act. A prior notice in April had postponed that due date until July 15, 2020.
“We are pleased to see the substantial rehabilitation test measuring period extended to March 31, 2021, along with the TCJA transition rule,” Michael J. Novogradac of Novogradac & Co. LLP told Tax Notes. “Unfortunately, the rule is too narrow and won’t help many developments that have been delayed by the pandemic.”
Novogradac said the IRS should adopt a rule similar to what was adopted for Opportunity Zones, such that the period from April 1 through December 31 this year would be suspended for purposes of the substantial rehabilitation test.
Before the TCJA was enacted, section 47 provided a two-tier credit for qualified expenditures incurred when rehabilitating a qualified building — a 10 percent credit for some nonresidential buildings placed in service before 1936, and a 20 percent credit for structures deemed historic by the National Park Service.
Under the old law, both credits were fully allowed in the tax year in which the qualified building was placed in service.
The TCJA eliminated the 10 percent credit for pre-1936 buildings and retained the 20 percent credit for certified historic structures. However, the 20 percent credit must now be claimed ratably over the five-year period beginning in the tax year in which the building was placed in service.
Under section 47(c)(1)(B)(i), a qualified rehabilitative building is treated as substantially rehabilitated if the expenditures during a 24-month period ending with or within the tax year exceed the greater of the taxpayer’s adjusted basis in the building or $5,000. For some rehabs that will be completed in phases, and if other requirements are met, the taxpayer can use a 60-month period instead.
A transition rule permits taxpayers to claim the 10 percent and 20 percent credits using pre-TCJA law if two conditions are met: (1) the taxpayer owned or leased the building on January 1, 2018, and continues to own or lease the building after that date; and (2) the 24- or 60-month period selected by the taxpayer for the substantial rehabilitation test begins by June 20, 2018.
For taxpayers whose measuring period under the substantial rehabilitation test to incur the qualified expenditures ends between April 1, 2020, and March 31, 2021, the last day of the 24- or 60-month measuring period will be postponed to March 31, 2021.
For taxpayers subject to the transition rule, if the 24- or 60-month measuring period ends between April 1, 2020, and March 31, 2021, the last day of the measuring period to pay or incur the qualified expenditures is postponed to March 31, 2021.