BILL ANALYSIS Ó
AB 771
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Date of Hearing: April 20, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 771
(Atkins) - As Introduced February 25, 2015
REVISED
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Personal income and corporation taxes: credits:
rehabilitation
SUMMARY: Allows a temporary income tax credit for qualified
costs paid or incurred by a taxpayer in rehabilitation of a
certified historic structure, as defined ("the Historic
Preservation Tax Credit"), in modified conformity with the
federal income tax laws, subject to an aggregate annual cap of
$50 million. Specifically, this bill:
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1)Declares legislative intent to preserve and restore
California's historic buildings, which are an important asset
to communities throughout California, and to create tools to
incentivize economic development and revitalize economically
distressed areas.
2)Allows an income tax credit, under both the Personal Income
Tax (PIT) and the Corporation Tax (CT) laws, in an amount
equal to 20% of the qualified rehabilitation expenditures with
respect to a certified historic structure, as defined.
3)Increases the applicable percentage to 25% in the case of a
certified historic structure that meets one of the following
criteria:
a) The structure is located on federal surplus property,
state, or local surplus property, as defined;
b) The rehabilitated structure includes affordable housing
for lower-income households, as defined by Health and
Safety Code Section 50079.5;
c) The structure is located in a designated census tract,
as defined in Revenue and Taxation Code Section
17053.73(b)(7);
d) The structure is a part of a military base reuse
authority established pursuant to Title 7.86 commencing
with Section 67800 of the Government Code; or,
e) The structure is a transit-oriented development that is
a higher density, mixed-use development within a walking
distance of one-half mile of a transit station.
4)Allows the credit for taxable years beginning on or after
January 1, 2016, and before January 1, 2024.
5)Provides that the term "certified historic structure" has the
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same meaning as defined in Section 47(c)(3) of the Internal
Revenue Code and additionally as a structure in this state
that is listed on the California Register of Historical
Resources.
6)Defines a "qualified residence" by reference to Internal
Revenue Code (IRC) Section 163(h)(4), as a residence that will
be owned and occupied, or will be occupied after the
rehabilitation, by an individual taxpayer as a taxpayer's
principal residence, provided that the taxpayer's modified
adjusted gross income is $200,000 or less.
7)Defines the term "qualified rehabilitation expenditure" by
reference to IRC Section 47(c), but modifies the federal
definition to provide that "qualified rehabilitation
expenditures" may include both of following:
a) Expenditures in connection with the rehabilitation of a
building even if the building is, or is reasonably expected
to be, tax-exempt use property.
b) Expenditures incurred by the taxpayer with respect to a
qualified principal residence for the rehabilitation of the
exterior of the building or rehabilitation necessary for
the functioning of the home, including, but not limited to,
rehabilitation of the electrical, plumbing, or foundation
of the principal residence.
8)Allows the Historic Preservation Tax Credit for qualified
rehabilitation expenditures for a qualified residence only if
the residence is determined jointly by the CTCAC and the OHP
to have a public benefit in the year of completion. The
amount of the Historic Preservation Tax Credit shall only be
allowed in an amount equal to or more than $5,000, not to
exceed $25,000; and the tax credit shall only be allowed to a
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taxpayer once every 10 taxable years.
9)Requires a taxpayer to request a reservation of the Historic
Preservation Tax Credit from California Tax Credit Allocation
Committee (CTCAC), in the form and manner prescribed by CTCAC.
10)Specifies that a tax credit reservation provided to a
taxpayer shall not constitute a determination by CTCAC
regarding a taxpayer's eligibility for the Historic
Preservation Tax Credit.
11)Provides that rehabilitation must commence within 18 months
of the issuance of the tax credit reservation; otherwise, the
reservation shall be forfeited and the credit amount
associated with the tax credit reservation shall be treated as
an unused allocation tax credit amount.
12)Authorizes the California Tax Credit Allocation Committee
(CTCAC) to reserve and allocate the Historic Preservation Tax
Credit and requires CTCAC to do all of the following:
a) On and after January 1, 2016, and before January 1,
2024, to reserve and allocate tax credits to applicants, as
provided.
b) Establish a procedure for applicants to file with the
CTCAC a written application, on a form jointly prescribed
by CTCAC and the Office of Historic Preservation (OHP) for
the reservation of the tax credit.
c) Establish criteria for reserving tax credits, consistent
with the requirements of the tax credit program. Criteria
shall include, but not be limited to, all of the following:
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i) The number of jobs created by the rehabilitation
project, both during and after the rehabilitation of the
structure;
ii) The expected increase in state and local tax
revenues derived from the rehabilitation project,
including those from increased wages and property taxes;
and,
iii) Any additional incentives or contributions included
in the rehabilitation project from federal, state, or
local governments.
iv) Finding of a public benefit, as determined jointly
with the OHP, in the case of qualified rehabilitation
expenditures with respect to a qualified residence.
d) Determine and designate, in consultation with the OHP,
applicants that meet the specified requirements to ensure
that the rehabilitation project meets the Secretary of the
Interior's Standards for Rehabilitation, as specified.
e) Process and approve, or reject, all tax credit
reservation applications.
f) Allocate an aggregate amount of the tax credits, under
both the PIT and the CT laws, and any carryover of
unallocated credits from prior years, subject to the annual
cap of $50 million.
g) Certify tax credits allocated to taxpayers.
h) Allocate a tax credit pursuant to the taxpayer's tax
credit reservation upon receipt of a cost certification for
the qualified rehabilitation expenditures. For projects
with qualified rehabilitation expenditures in excess of
$250,000, the cost certification must be issued by a
licensed certified public accountant.
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i) Provide the Franchise Tax Board (FTB) an annual list of
the taxpayers that were allocated a credit, as specified,
including each taxpayer's taxpayer identification number
and the amount allocated.
13)Requires CTCAC to set aside $10 million of tax credits each
calendar year for taxpayers with qualified rehabilitation
expenditures of less than $1 million. To the extent that this
amount is not fully reserved in any calendar year, the unused
portion shall become available for reservation to other
taxpayers.
14)Allows the CTCAC to adopt a reasonable fee in an amount
sufficient to cover its expenses and the expenses by the OHP
incurred in administering the Historic Preservation Tax Credit
program.
15)Authorizes the taxpayer to carry forward the tax credit to
the following tax year, and succeeding seven years, if
necessary, until the credit is exhausted.
16)Disallows any deduction for the amount of paid or incurred by
the taxpayer for which a credit is allowed to the taxpayer.
17)Requires the basis of the property to be reduced by the
amount of the Historic Preservation Tax Credit allowed.
18)Adds a five-year tax credit recapture provision, in
conformity with IRC Section 50(a), when the property, or
interest in the property, is sold.
19)Specify that tax credits awarded to an "S" corporation shall
be allocated among the shareholders of that corporation
pro-rata in accordance with their respective pro rata shares
determined in accordance with specified provisions of the IRC.
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20)Provides that the credit shall be allocated to the partners
of a partnership owning the historic rehabilitation project in
accordance with the partnership agreement, regardless of how
the federal historic rehabilitation tax credit, with respect
to the project, is allocated to the partners, or whether the
allocation of the credit under the terms of the agreement has
substantial economic effect, within the meaning of Section
704(b) of the Internal Revenue Code (IRC).
21)Allow the Historic Preservation Tax Credit to be used to
reduce the taxpayer's tax liability below the tentative
minimum tax.
22)Contrary to the federal law, allows the Historic Preservation
Tax Credit in the case of an activity engaged in by an
individual or an S corporation not for profit.
23)Requires the Legislative Analyst Office, beginning January 1,
2017, to collaborate with the CTCAC to review the
effectiveness of the historic building tax credit program.
24)Provides that the review shall include an analysis of the
demand for the tax credit, the types and uses of projects
receiving the tax credit, the jobs created by the use of the
tax credit, and the economic impact of the tax credit.
25)States the intent of the Legislature, in enacting this bill,
to comply with the requirements of Section 41 of the Revenue
and Taxation Code (R&TC).
26)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
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1)Allows a two-tiered tax credit for the rehabilitation expenses
of older or historic buildings. Specifically, it provides:
a) A 10% credit for the rehabilitation expenses of
non-historic buildings with an additional requirement that
the building must have been originally constructed before
1936; and,
b) A 20% credit for the rehabilitation expenses of a
certified historic structure, i.e. a structure that is
listed on the national Register of Historic Places or
located in a Registered Historic District and determined to
be of significance to the Historical District.
2)Allows a taxpayer engaged in a trade or business to deduct all
expenses that are considered ordinary and necessary in
conducting that trade or business.
EXISTING STATE LAW does not conform to the federal tax credit
for rehabilitation expenses of older or historic buildings, but
does allow taxpayers, in conformity with the federal law, to
deduct ordinary and necessary business expenses.
FISCAL EFFECT: The FTB staff estimates that this bill will
result in an annual revenue loss of $19 million in the fiscal
year (FY) 2015-16, $41 million in FY 2016-17, and $48 million in
FY 2017-18.
COMMENTS:
1)The Author's Statement : The author has provided the following
statement in support of this bill:
"California is one of the few states to not provide an
incentive for the preservation of our historic buildings. A
state tax credit for this purpose would help stimulate local
economies, revitalize downtown areas and communities, promote
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and increase the supply of affordable housing, support smart
growth through infill development, encourage property
maintenance and rehabilitation, and leverage use of the
federal rehabilitation tax credit.
"Additionally, it would increase construction and building
industry job creation, increase state tax revenues through
increased employment and wages, increase local property tax
revenues through increased property values, and increase local
tax revenues through sales tax and heritage tourism.
"AB 771 helps communities adjust to the phase-out of
redevelopment dollars and stimulates public and private
investment, all while building civic pride as we celebrate our
heritage and preserve California's past."
2)Arguments in Support . The proponents state that this bill
"will incentivize private investment to rehabilitate historic
properties," many of which are located in "urban core areas."
Upgrading these properties will support "city efforts to spur
and retain economic activity in downtown areas." The
proponents argue that the rehabilitation of historic
properties will "increase property values, generating revenue
for cities, counties, schools and special districts." In
addition, this bill would provide incentives for projects that
"include affordable housing and transit-oriented development."
3)Federal Historic Tax Credit (HTC) . The Federal Historic
Preservation Tax Incentives Program, created in 1976, is
administered by the National Park Service in partnership with
the State Historic Preservation Office. The goal of the
program is to promote community revitalization and encourage
private investment through historic building rehabilitation.
Over 39,600 projects to rehabilitate historic buildings have
been undertaken since the first project using the historic tax
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incentives was completed in 1977.<1> The HTC is claimed not
only by large projects. As reported by the National Park
Service, in fiscal year 2013, almost 8% of the certified
projects were under $100,000, 46% were under $500,000, and the
majority of all projects - 59% - involved less than $1 million
in costs. (Id., p. 11.)
Housing has been the single most important use for rehabilitated
historic buildings under the program. Over the past five
years, between 36% and 69% of the projects have included
housing. Almost one-half of the projects certified in 2013,
or 46%, reported housing as a final primary use, including
multiple-family housing. As a result of this program, more
than 130,000 of low- and moderate-income housing units have
been created. According to the report issued by the National
Park Service, one of the objectives of the program is to
create and retain affordable housing. (Id., p. 12.) Other
incentives utilized by developers, in addition to the HTC,
include the New Market Tax Credit Program, Tax Increment
Financing, and local property tax abatements.
To qualify for the historic tax credit, a project must satisfy
the requirements of IRC Section 47 and related regulations, as
well as architectural standards regulated by the National
Parks Service. Certification of Historic Significance is the
first step in establishing eligibility for the HTC. A
building must be individually listed in the national Register
of Historic Places or be certified as contributing to a
registered historic district in order to qualify for the 20%
credit. A building that has been certified as non-significant
(i.e., not contributing to a National Register historic
district), but was built before 1936, can qualify for a 10%
tax credit if it is rehabilitated for income-producing,
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<1> Federal Tax Incentives for Rehabilitating Historic
Buildings, U.S. Department of the Interior, National Park
Service Technical Preservation Services, Washington, DC, March
2014.
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non-residential purposes. A developer must submit an
application detailing the plans and specifications for the
rehabilitation. The plans must satisfy the Secretary of
Interior Standards for Rehabilitation.
Once the project is completed, a request for certification of
completion is submitted. If the request is granted, the
rehabilitation is considered a "certified rehabilitation." A
certification of a completed project is issued only when all
work has been finished on the certified historic building.
Generally, the HTC must be claimed in the tax year in which
the rehabilitated building is placed in service. However, the
credit may be claimed before the date the property is placed
in service under the rules for qualified progress expenditures
(IRC Section 47(d).) Existing federal law contains a
so-called "recapture provision," which provides that a portion
of the tax credit must be recaptured (returned to the Federal
Government) if the rehabilitated building is sold or otherwise
ceases to qualify within five years from the date the building
is placed in service.
4)The Financing Structure . In order to raise funds for
rehabilitation of historic buildings, the owners, in most
cases, enter into various financing transactions with private
entities using the HTC, among other tax and financial
incentives. A property owner, because of his/her tax
position, may elect to syndicate the HTC to a third party
through the issuance of partnership or limited liability
company (LLC) interests. The financing of a historic building
rehabilitation using the HTC requires the participation of a
private investor (mostly a taxable corporation) that could
take advantage of the credits to reduce its income tax
liability. A typical arrangement is to match a corporate tax
credit investor entity with a project developer, creating a
partnership (such as a LLC) where the investor is allocated
the tax credits in exchange for cash and the developer acts as
a managing partner (or member). Usually, the percentage of
allocated tax credits matches the percentage of allocated
profits. Thus, if an investor entity is allocated all of the
tax credits, then that entity will also receive all or nearly
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all of the profits for at least five years. In exchange, the
developer will receive a developer fee or other distributions.
An investor must retain ownership of the property (i.e.
remain in the partnership) for at least five years after the
project is placed in service in order to receive the full
benefit of the tax credits, or the tax credits will be subject
to recapture. At the end of this period, either the developer
will buy out the investor or the investor will sell its
interest in the partnership.
In the case of a HTC, a certified historic structure, i.e. a
building, must be owned by either the entity that utilizes the
credit or a master tenant that leases the entire building from
the owner. In a case of a master tenant partnership
structure, the corporate entity will be allocated most, if not
all, of the credit and profits. The corporate entity will
also likely to receive an annual priority return, the amount
of which is equal to a very small percentage of the investor's
equity in the project. In exchange, the investor will
contribute cash to the partnership to provide financing for
the rehabilitation project. It is expected that after the
expiration of the five-year recapture period the financing
structure will be unwound and the property owner will directly
own the historic building.
5)Tax Incentives: Do They Work ? Generally, advocates for tax
incentives, such as Arthur Laffer and N. Gregory Mankiw, argue
that reduced taxes allow taxpayers to invest money that would
otherwise be paid in taxes to better use, thereby creating
additional economic activity. "Supply-siders" posit that
higher taxes do not result in more government revenue;
instead, they suppress additional innovation and investment
that would have led to more economic activity and, therefore,
healthier public treasuries, under lower marginal tax rates.
Industry-specific credits complement this theory by lowering
tax costs for industries that provide positive multiplier
effects, such as stimulating economic activity among suppliers
and increasing economy-wide purchasing power resulting from
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hiring additional employees.
Critics, however, assert that tax incentives rarely result in
additional economic activity. Companies locate in California
because of its competitive advantages, namely its environment,
weather, transportation infrastructure, access to ports,
highways, and railroads, as well as its highly skilled
workforce and world class higher education system. These
advantages trump perceived disadvantages resulting from
California's tax structure and other policies. Additionally,
critics argue that industry-specific tax incentives do not
actually effect business decisions; instead, enhanced credits
and deductions reward firms for investments they would have
made anyway. [See, e.g., D. Neumark, J. Zhang, and J. Kolko,
Are Businesses Fleeing the State? Interstate Business
Location and Employment Change in California, (a PPIC report
showing that, while California loses jobs due to firms leaving
the state, these losses have a minimal effect on the economy);
D. Neumark and J. Kolko, Are California Companies Shifting
Their Employment to Other States? (finding that, while
California companies have shifted jobs to other states,
out-of-state firms have offset these losses by hiring more in
California).]
As noted by the Legislative Analyst Office (LAO) in the
presentation at this Committee's hearing "Assessing Tax
Expenditure Programs in Light of California's Fiscal
Challenges" on February 22, 2012, "Policymakers should regard
many TEPs [tax expenditure programs] evaluations with
skepticism." It was further explained that, "Analysis of
alternative uses of public funds is difficult and often
omitted entirely from . . . studies [of TEPs]. These studies
also usually rely on extensive and sometimes subjective
assumptions which, if changed, can produce very different
results . . . . It is rare that the value of TEPs can be
demonstrated conclusively compared to these alternate uses of
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tax dollars. If the Legislature wishes to use TEPs, despite
these challenges, it is important that TEPs be used
cautiously, structured carefully, and reviewed regularly to
consider if they operate in an effective and cost-efficient
manner."
6)The Proposed Historic Preservation Tax Credit: a Different
Kind of Credit ? This bill creates a historic preservation tax
credit program modeled after the federal HTC. Unlike the
federal HTC, however, the proposed credit is not permanent;
the credit is allowed for seven taxable years, beginning with
the 2016 tax year. This bill also provides for an increased
tax credit rate of 20% and allows an additional 5% for certain
projects, such as low-income housing; a transit-oriented
development; and a structure located on federal, state, or
local surplus property, in a designated census tract, on a
specified military base. A building that is not included in
the National Register of Historic Places may still qualify for
the state credit if it appears on the California Register of
Historical Resources.
The proposed credit is different from other state tax credits,
where a certain class of individuals or businesses may claim a
credit based on membership in a certain industry or business
location. In contrast to many tax incentives in California,
the proposed tax credit is targeted, is capped at $50 million
per calendar year, and is required to be allocated to
taxpayers by the CTCAC on a competitive basis. In many
respects, it is similar to a grant program. This bill
prescribes certain criteria for CTCAC to utilize in
determining whether a project should be awarded the state HTC,
including the estimated number of jobs and potential state and
local tax revenues to be generated by the project. Thus, the
proposed credit is intended to result in a quantifiable public
benefit. Finally, the LAO is required to review the
effectiveness of this tax credit program, on an annual basis.
The credit program sunsets on December 1, 2024, and is not
refundable.
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7)How Effective Are Historic Tax Credit Programs in Other
States ? Thirty-five states offer state tax incentives of
various kinds for historic preservation rehabilitation
projects. In many states, the income tax credit programs are
similar to the federal HTC program. Several studies conducted
by Rutgers University have shown that "in many parts of the
country, $1 million in historic rehabilitation yields markedly
better effects on employment, income, GSP, and state and local
taxes than an equal investment in new construction or many
other economic activities (e.g., manufacturing or services)."
<2> It was concluded that states with the strongest
historical preservation tax credit statutes regularly lead the
nation in the use of the federal HTC, which, due to its
leverage and multiplier effects, benefits both state economies
and the national economy. For example, an annual report of
the Ohio Historic Preservation tax credit program states that
the $327 million in tax credits approved are projected to
leverage more than $2 billion in private investment and
federal tax credits, which translates to $6.25 of investment
for every dollar of the state tax credit.<3> The Ohio
Historic Preservation tax credit is capped at $60 million per
year and allocated to applicants. According to a 2011 economic
impact study conducted by Cleveland State University, the $246
million in approved tax credits is expected to result, during
the construction period alone, in nearly $10 billion in
economic activities in the state between 2007 and 2025.
Recognizing the economic impact and job creation of the
program, the Ohio General Assembly renewed the Program in the
state's fiscal year 2012-13 budget. Similarly, it was found
that in Minnesota and North Carolina, respectively, every
dollar of the state historic tax credit creates $8.32 in
economic activity and $12.51 in economic benefit.
---------------------------
<2> Annual Report on the Economic Impact of the Federal Historic
Tax Credit for FY 2012, Rutgers University, E. Bloustein School
of Planning and Public Policy, p. 5.
<3> Ohio Historic Preservation Tax Credit Program, 2012 Annual
Report, prepared by the Ohio Development Services Agency, the
Ohio Historical Society and the Ohio Department of Taxation,
April 2013, p. 15.
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8)Bifurcation of the Credit . A taxpayer who uses a state tax
credit to reduce his/her state tax liability generally loses
the ability to take a federal deduction for the state tax paid
with the use of the state historic tax credit. As such, the
value of a state tax credit is less that its face value. In
practice, when federal credits are allocated through a
partnership to an investor, ownership interests are valued at
$0.95 or more on the dollar, while the after-tax value of the
state tax credits tends to be in the range of $0.50 to $0.55
on the dollar.<4> Furthermore, a state tax credit has value
only to the extent that the taxpayer holding the credit has
sufficient tax liability in the state. To remedy this
problem, some states have permitted an outright sale of the
credit or made it refundable, while others have allowed a
partnership owning the property to make a disproportionate
distribution (or bifurcation) of the federal and state credits
to its partners. The bifurcation approach allows investors to
enter into partnership agreements where they can purchase
state tax credits without the corresponding federal credits.
Thus, bifurcation allows investors to join the developing
partnership and be awarded the federal HTC, a state historic
tax credit, or both. Consequently, investors with no federal
tax liability, but sufficient state tax liability, would have
an incentive to invest in a rehabilitation project that would
allow them to offset unrelated state income tax liability with
the state HTC.
This bill requires that the credit be allocated to the partners
of a partnership in accordance with the partnership agreement,
regardless of how the federal HTC is allocated to the partners
or whether the allocation of the state credit under the
partnership agreement has "substantial economic effect."
Because this bill specifically excludes any consideration of
---------------------------
<4> State Tax Credits for Historic Preservation, National Trust
for Historic Preservation, a policy report, H. Schwartz, p. 3.
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the "substantial economic effect" of the partners'
distributions, it creates a divergence from long-established
tax policy and potentially leads to tax shelter opportunities.
A bifurcation of the proposed tax credit from the federal HTC
highlights a natural tension between the need to draw more
investors and investment dollars to projects that rehabilitate
historic buildings and create more low-income housing units
and tax policy that strives to ensure that investments have
substance other than tax incentives. The bifurcation
approach, with very little economic impact on investors other
than tax credits, balances at the precipice of tax sheltering
activities. However, this approach was already approved by
the Legislature in the case of the state's low-income housing
tax credit (LIHTC) program. The bifurcation has been allowed
in large part due to the type of projects created from the
investment and the difficulty of raising sufficient capital to
create low-income housing absent the credit incentives. In
that case, the Legislature determined that the benefits of
increased project capital exceeded the tax policy concerns of
sanctioning a state tax shelter. Traditionally, the
low-income housing tax credit (LIHTC) has been administered
just as though it were an allocated grant program. The Tax
Credit Allocation Committee evaluates the applications and
allocates the available funds (the amount of which is capped)
to those investors/developers who promise to produce the most
housing for the state's dollar. Although the program is in
the form of a tax credit, all the participants behave
virtually as though they were dealing with an allocation of
grant funds. For this reason, the Legislature decided that it
is unlikely that a separation of a state and federal LIHTC
would result in a significant increase of tax sheltering
activities. The proposed credit is intended as a tool of
economic development, especially in economically distressed
areas that are difficult to revitalize and in light of the
recent dissolution of the redevelopment program. The
Committee may wish to consider whether the proposed historic
preservation tax credit program is sufficiently comparable to
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the LIHTC program and whether it warrants a similar treatment.
9)Sale or Abandonment of Partnership Interests . As discussed,
many rehabilitation projects are developed by a partnership or
a LLC, in which the developer is the general partner or
manager with a de minimus ownership interest and investors are
limited partners/members with a 99.9% ownership interest in
the partnership for the tax credit compliance period. A
partner who sells or exchanges his/her partnership interest
recognizes a capital loss or capital gain on that sale or
exchange depending on the partner's basis in the partnership
and the purchase price. If a partner abandons or forfeits
his/her partnership interest, he/she will recognize an
ordinary loss, provided that there are no partnership
liabilities from which the partner is relieved. The amount of
that loss is equal to the partner's basis in the partnership.
One of the concerns raised in connection with the separation of
the state and federal LIHTC was that an investor would be able
to offset his/her income (albeit in different tax years) with
both the LIHTC and a loss realized from the abandonment or
sale of his/her partnership interest. Consequently, the
Legislature decided to defer a recognition of that loss until
the first taxable year following the expiration of the federal
credit, i.e. a 10-year period, which mitigated the negative
effect of an allocation of the state credit lacking
substantial economic effect. This bill would add a similar
deferral provision for the recognition of loses in the context
of the state historic preservation tax credit program.
10)Owner-Occupied Building . Under the federal HTC program,
owner-occupied buildings are not eligible for the credit.
This bill takes a different approach in that it would allow
both income-producing properties and owner-occupied
residential buildings to qualify for the state tax credit.
However, this bill imposes an additional requirement for a
taxpayer who has received the credit to rehabilitate a
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"qualified residence": the residence must become the
taxpayer's "principal residence" within two years after the
rehabilitation. Nonetheless, the Committee may still wish to
consider whether a subsidy for rehabilitation of an
owner-occupied building is an effective tool of economic
development.
11)Tax Credit Percentages . This bill proposes tax credit
percentages that are similar or higher than the federal HTC
rates. The Committee may wish to consider whether the proposed
percentages should be reduced in light of the fact that the
California income tax rates are substantially lower than
federal income tax rates.
12)Definition of a "Certified Historic Structure ." It is unclear
to Committee staff whether the author has intended to allow
the credit for qualified expenditures incurred in
rehabilitation of a historic structure located in California
only. The Committee may wish to consider a clarifying
amendment to specify the intent of the author.
13)Implementation Concerns . The FTB staff identified a number
of implementation concerns in its analysis of this bill. The
FTB staff recommends that the bill be amended to specify that
a taxpayer receive an "allocation," instead of "reservation,"
of the credit from the CTCAC. Furthermore, the FTB staff
notes that this bill lacks a mechanism to recapture the credit
if the taxpayer has failed to make a "qualified residence"
his/her "principal residence" within two years after the
rehabilitation. Finally, the FTB staff suggests technical
amendments, including a clarification of the definitions of
"certified historic structure" and "qualified rehabilitation
expenditure."
14)Section 41 : On September 29, 2014, Governor Brown signed SB
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1335 (Leno), Chapter 845, Statutes of 2014, which added R&TC
Section 41. SB 1335 recognized that the Legislature should
apply the same level of review used for government spending
programs to tax preference programs, including tax credits.
Thus, Section 41 requires any bill that is introduced on or
after January 1, 2015 and allows a new PIT credit to contain
specific goals, purposes, and objectives that the tax credit
will achieve. In addition, Section 41 requires detailed
performance indicators for the Legislature to use when
measuring whether the tax credit meets the goals, purposes,
and objectives so-identified.
This bill provides legislative intent to comply with the
requirements of R&TC Section 41. While this bill does not
specify the goals of the proposed HTC, it does require the
CTCAC to establish criteria for reserving tax credits,
consistent with the criteria outlined in the bill. This bill
also requires the Legislative Analyst Office to collaborate
with the CTCAC to review the effectiveness of the historic
building tax credit program. Nonetheless, the Committee may
wish to consider whether it is appropriate to additionally
articulate the purposes being served by this bill.
15)Related Legislation .
a) AB 1999(Atkins), of the 2013-14 Legislative Session,
would have allowed a tax credit substantially similar to
the credit proposed by this bill. AB 1999 was vetoed.
b) AB 166 (Cedillo), of the 2001-02 Legislative Session,
would have allowed a tax credit in an amount determined in
accordance with provisions of the federal historic
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rehabilitation tax credit. AB 166 was held on the Assembly
Appropriations Committee's Suspense File.
REGISTERED SUPPORT / OPPOSITION:
Support
American Institute of Architects California Council
American Planning Association, California Chapter
California Association of Realtors
California Preservation Foundation
League of California Cities
Opposition
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098
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