IRS finalizes regulations for rehabilitation tax credit

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The Internal Revenue Service released final regulations Tuesday for taxpayers who claim the rehabilitation credit under changes made in the Tax Cuts and Jobs Act of 2017.

The TJCA amended the rehabilitation credit so taxpayers can now claim the rehabilitation credit over a five-year period. The TCJA amendments generally apply to a taxpayer’s qualified rehabilitation expenditures that are paid or incurred after Dec. 31, 2017.

Taxpayers, however, can claim the credit all in one year under pre-TCJA rules for projects that qualify under a transition rule from the IRS.

The transition rule enables taxpayers to use the prior law if the project meets the following conditions:

  • The taxpayer owns or leases the building on Jan. 1, 2018 and the entire period thereafter; and
  • The 24- or 60-month period selected for the substantial rehabilitation test begins by June 20, 2018.

The final regs also require taxpayers to determine the rehabilitation credit amount in the year they place the building into service and allocate that amount ratably over the five-year period.

The final regulations also include a rule to coordinate the TCJA amendments with the special rules for the investment credit, of which the rehabilitation credit is a part. Finally, the final regulations include examples showing how to apply the rules.

Earlier this year, the CARES Act also provided a boost to renovations of business property by making a technical correction in the TCJA to allow qualified improvement property such as restaurants and stores to be eligible for 15-year depreciation and, thus, for 100 percent first-year bonus depreciation. A drafting error in the TCJA, sometimes referred to as the “retail glitch,” had held up renovations of stores and restaurants and led to over two years of political wrangling between Democrats and Republicans in Congress before the CARES Act included a provision to correct the error (see story).

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Tax regulations IRS Tax reform Tax credits