Historic Tax Credits – Third of a Three-Part Series
By Abby Hood, CPA
Iowa Historic Tax Credits: Qualified Rehabilitation Expenditures
So far, the Historic Tax Credit (HTC) series has discussed my love for historical structures (LINK) and the application process for HTC in the state of Iowa (LINK).
Now it is time to cover the types of costs that can go towards the amount of credits to be received, also known as Qualified Rehabilitation Expenditure (QRE).
It is extremely important to understand what is a QRE and what is not considered a QRE during the budgeting process (Part II) so the credits anticipated to be received line up to what will actually be received to avoid potential shortfalls in sources/financing of the project.
Here are some general rehabilitation expenditures and the potential classification between eligible and in-eligible. This is not an inclusive list – contact MHCS to talk through your project to ensure your project doesn’t hit any unexpected financing issues.
Qualified Rehabilitation Expenditures:
- Construction costs (wiring, plumbing, central heating and air conditioning, windows, insulation, fire suppression systems, etc.)
- Architectural and engineering fees
- Construction interest
- Construction taxes
In-eligible Expenditures (not QREs):
- Acquisition costs (building and land)
- Costs associated with enlargement/additional square footage added to the structure
- Personal property (equipment, furnishings, non-affixed property)
- Land and site improvements (paving, driveways, landscaping, irrigation system)
- Acquisition interest
- Acquisition taxes
- Sales and marketing costs
Questionable Expenditures (These are not straight forward expenditures. Additional analysis is required to see if any or part of the expenditure can be considered a QRE.):
- Developer fee
- Legal costs
Calculations of Credits
The total amount of QREs is multiplied by the state HTC rate (25% for Iowa) and the federal HTC rate (usually 20%) to arrive at the total credit amount.
For example: You purchase a building which is on the National Registry of Historical Places. However, you need to renovate the building to make it a usable space. The entire project will cost $1,200,000 which includes acquisition of the property, rehabilitation of the structure, architectural and engineering fees, site improvements, interest on loans, and more.
Of the $1.2 million project costs, $500,000 is considered QREs - rehabilitation of the structure, architectural and engineering fees, interest on construction loans, and other eligible expenditures.
To figure out the total tax benefit, take the QREs of $500,000 and multiply by 25% to arrive at $125,000 in Iowa HTCs. To figure out the federal tax benefit, again take the $500,000 in QREs and multiply by 20% to arrive at $100,000, for a total tax benefit of $225,000.
$500,000 x 25% = $125,000 in state credits
$500,000 x 20% = $100,000 in federal credits
Total tax credits/benefit = $225,000
The credits can either be applied to the entity’s tax return(s) or sold and transferred to another entity in need of the tax benefit.
Historical structures have peaked my interest for many years and through Historic Tax Credits, I hope to be involved with revitalization of many historic structures in the years to come. Please reach out to MHCS with any questions, as we can assist with consulting regarding the overall HTC process, provide insight on the application, examination of QREs required by the state of Iowa, application of the state and federal tax credits on tax return(s), and more.
Abby Hood, CPA | Manager