Rehabilitation Credit Allocated Over a 5-Year Period
| Published date | 22 May 2020 |
| Citation | 85 FR 31096 |
| Record Number | 2020-09879 |
| Section | Proposed rules |
| Court | Internal Revenue Service |
Federal Register, Volume 85 Issue 100 (Friday, May 22, 2020)
[Federal Register Volume 85, Number 100 (Friday, May 22, 2020)]
[Proposed Rules]
[Pages 31096-31099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09879]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-124327-19]
RIN 1545-BP56
Rehabilitation Credit Allocated Over a 5-Year Period
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations concerning the
rehabilitation credit, including rules to coordinate the new 5-year
period over which the credit may be claimed with other special rules
for investment credit property. These proposed regulations affect
taxpayers that claim the rehabilitation credit.
DATES: Written or electronic comments and requests for a public hearing
must be received by July 21, 2020. Requests for a public hearing must
be submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-124327-
19) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (Treasury
Department) and the IRS will publish for public availability any
comment submitted electronically, and to the extent practicable on
paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR
(REG-124327-19), Room 5203, Internal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
call Barbara J. Campbell, (202) 317-4137; concerning submissions of
comments and requests for a public hearing, call Regina Johnson, (202)
317-5177 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to Title 26 part 1 under
section 47 of the Internal Revenue Code (Code). The rehabilitation
credit under section 47 is listed as an investment credit under section
46, and the investment credit under section 46 is a current year
general business credit under section 38. On December 22, 2017, section
47 was amended by section 13402 of Public Law 115-97, 131 Stat. 2054
(2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA).
Prior to the TCJA, former section 47(a) provided a two-tier credit
for qualified rehabilitation expenditures (QREs) incurred in connection
with the rehabilitation of a qualified rehabilitated building (QRB).
Former section 47(a)(2) allowed a 20-percent credit for QREs with
respect to a certified historic structure, and former section 47(a)(1)
allowed a 10-percent credit for QREs with respect to a QRB other than a
certified historic structure (for certain buildings first placed in
service before 1936 (pre-1936 buildings)). Under former section 47,
both the 20-percent and 10-percent credits were fully allowed in the
taxable year the QRB was placed in service.
Section 13402(a) of the TCJA repealed the 10-percent credit for
pre-1936 buildings and modified the rules for claiming the 20-percent
credit for certified historic structures. Section 13402(c)(1) of the
TCJA provides that these amendments are generally applicable to QRE
amounts paid or incurred after December 31, 2017, subject to a
transition rule provided in section 13402(c)(2) of the TCJA. This
statutory transition rule provides that in the case of QREs (for either
a certified historic structure eligible for a 20-percent credit or a
pre-1936 building eligible for a 10-percent credit prior to December
31, 2017), with respect to any building owned or leased (as provided
under present law) by the taxpayer at all times on and after January 1,
2018, the
[[Page 31097]]
24-month period selected by the taxpayer (section 47(c)(1)(B)(i), as
amended by section 13402(b)), or the 60-month period selected by the
taxpayer under the rule for phased rehabilitation (section
47(c)(1)(B)(ii), as amended by section 13402(b)), is to begin not later
than the end of the 180-day period beginning on December 22, 2017, and
the amendments made by section 13402 of the TCJA apply to such QREs
paid or incurred after the end of the taxable year in which such 24-
month or 60-month period ends.
As amended by the TCJA, section 47(a)(1) provides that for purposes
of the investment credit under section 46, for any taxable year during
the 5-year period beginning in the taxable year in which a QRB is
placed in service, the rehabilitation credit for such taxable year is
an amount equal to the ratable share for the year. Also, as amended by
the TCJA, section 47(a)(2) defines the ratable share for any taxable
year during the credit period as the amount equal to 20 percent of the
QREs with respect to the QRB, as allocated ratably to each year during
the credit period. Section 47(b)(1), which the TCJA did not amend,
provides that QREs with respect to any QRB are taken into account for
the taxable year in which the QRB is placed in service.
Explanation of Provisions
I. Overview
As noted in the Background, the rehabilitation credit is no longer
fully allowed in the taxable year the QRB is placed in service.
Instead, the rehabilitation credit must be claimed ratably over the 5-
year period beginning in the taxable year in which a QRB is placed in
service. The Treasury Department and the IRS are aware that taxpayers
and practitioners have questioned how the 5-year period impacts
taxpayers claiming the rehabilitation credit, including how to apply
the special rules of section 50 relating to recapture, basis
adjustment, and leased property. In particular, practitioners have
questioned whether the rehabilitation credit is determined in the year
the QRB is placed in service and allocated ratably over the 5-year
period, or whether five separate rehabilitation credits are determined
during each year of the 5-year period.
As explained in Part II of this Explanation of Provisions, these
proposed regulations provide that the rehabilitation credit is properly
determined in the year the QRB is placed in service (consistent with
prior law) but allocated ratably over the 5-year period as required by
the TCJA, rather than resulting in the determination of five separate
rehabilitation credits. Similarly, as explained in Part III of this
Explanation of Provisions, these proposed regulations follow this same
prior law approach for the determination of a single rehabilitation
credit for purposes of applying the rules of section 50. Therefore,
taxpayers claiming the rehabilitation credit under section 47 with
respect to QREs paid or incurred after December 31, 2017, generally
will have the same Federal income tax consequences from the rules under
section 50 for recapture, basis adjustment, and leased property as
taxpayers claiming the rehabilitation credit under prior law.
The proposed regulations add Sec. 1.47-7(a) through (e) and
include: A general rule for calculating the rehabilitation credit;
definitions of ratable share and rehabilitation credit determined; and
a rule coordinating the changes to section 47 with the special rules in
section 50. The proposed regulations also contain examples, including
examples illustrating the interaction of section 47 with rules in
section 50(a) (recapture in case of dispositions, etc.), section 50(c)
(basis adjustment to investment credit property), and section 50(d)(5)
(relating to certain leased property when the lessee is treated as
owner and subject to an income inclusion requirement).
II. Proposed Sec. 1.47-7(a), (b), and (c): Rehabilitation Credit
Allocated Over a 5-Year Period
Consistent with section 47(a)(1), proposed Sec. 1.47-7(a) provides
a general rule that, for purposes of the investment credit under
section 46, for any taxable year during the 5-year period the
rehabilitation credit for the year is the ratable share.
Proposed Sec. 1.47-7(b) generally follows the definition of
ratable share in section 47(a)(2) but, for clarification, replaces
``QREs'' with the term ``rehabilitation credit determined'' as defined
in proposed Sec. 1.47-7(c). Specifically, proposed Sec. 1.47-7(b)
defines the term ratable share as the amount equal to 20 percent of the
rehabilitation credit determined with respect to the QRB, as allocated
ratably to each taxable year during the 5-year credit period. Proposed
Sec. 1.47-7(c) defines the term rehabilitation credit determined as
the amount equal to 20 percent of the QREs, as defined in section
47(c)(2) and Sec. 1.48-12(c) of the Income Tax Regulations, taken into
account under section 47(b)(1) for the taxable year in which the QRB is
placed in service. However, if the taxpayer claims the additional first
year depreciation for the QREs pursuant to Sec. 1.168(k)-2(g)(9),
proposed Sec. 1.47-7(c) defines the rehabilitation credit determined
as the amount equal to 20 percent of the remaining rehabilitated basis,
as defined in Sec. 1.168(k)-2(g)(9)(i)(B), of the QRB for the taxable
year in which such building is placed in service. Proposed Sec. 1.47-
7(c) is included to clarify that the rehabilitation credit is
determined in the year the QRB is placed in service and allocated
ratably over the 5-year period under proposed Sec. 1.47-7(b).
Determining the total amount of the credit in the first year the
QRB is placed in service and allocating the credit over the 5-year
period is consistent with the text of the statute, as well as the
intent of Congress, because the determination does not change the total
amount of rehabilitation credit over the 5-year period or the amount of
rehabilitation credit for purposes of section 46 in any individual year
of the 5-year period. The plain language in section 47(a)(1), (a)(2),
and (b)(1) makes clear that one rehabilitation credit is allocated
ratably over a 5-year period. First, section 47(a)(1) and (a)(2)
effectively allocate the 20-percent rehabilitation credit over a 5-year
period. Second, section 47(b)(1) requires that QREs are taken into
account in the taxable year the QRB is placed in service, which is the
first year in the 5-year period. Because QREs are taken into account in
the first taxable year the QRB is placed in service under section
47(b)(1), the rehabilitation credit for a QRB is effectively fixed, or
determined, as of that first year. In sum, the overall structure of
section 47(a) and (b)(1) functions to allocate the rehabilitation
credit that is determined in the taxable year the QRB is placed in
service over a 5-year period for each of those taxable years, rather
than creating five separate rehabilitation credits for a single QRB.
Further, this reading of the statutory text is consistent with the
conference report accompanying the TCJA (H.R. Rept. No. 466, 115th
Cong.435-436 (2017)) (Conference Report) and the Joint Committee on
Taxation's General Explanation of Public Law 115-97, 210 (Staff of the
Joint Committee on Taxation, 115th Cong., General Explanation of Public
Law 115-97 (Comm. Print 2018) (Bluebook)). The Conference Report states
that Congress ``intended that the sum of the ratable shares for the
taxable years during the five-year period does not exceed 100 percent
of the credit for qualified rehabilitation expenditures for the
qualified rehabilitated building.'' See Conference Report, at 435-436;
Bluebook, at 210. By determining the
[[Page 31098]]
rehabilitation credit based on 100 percent of the QREs in the year QREs
are taken into account under section 47(b)(1), that is, the year in
which the QRB is placed in service, and ratably allocating the amount
determined over the 5-year period, the proposed regulations ensure that
the sum of the ratable shares will never violate Congressional intent.
Comments are requested with respect to any specific concerns taxpayers
may have with this plain reading of the operative statutory text.
III. Proposed Sec. 1.47-7(d) and (e): Coordination With Section 50 and
Examples
Proposed Sec. 1.47-7(d) describes the coordination with the
special rules of section 50 and makes clear that, for purposes of
applying the rules in section 50, the full rehabilitation credit amount
is determined in the first year of the 5-year period, and then
allocated ratably over that 5-year period. Determining the credit in
the same manner for purposes of sections 47 and 50 provides certainty
and reduces the complexity under section 50 that would result if
taxpayers were required to determine five separate rehabilitation
credits. For example, if five separate rehabilitation credits were
determined, then there would be five separate recapture periods under
section 50(a) with respect to a single QRB. This would increase the
length of the recapture period and increase the recapture amount as
compared to results under section 50(a) prior to the TCJA changes to
section 47. The proposed regulations ensure that this is not the result
under section 50.
Moreover, in coordinating the rules between sections 47 and 50, the
Treasury Department and the IRS considered the fact that that there is
no indication that, in changing section 47, Congress intended to modify
the application of section 50. The Conference Report and the Bluebook
explain that the TCJA's amendments to section 47 retain the 20-percent
credit for QREs with respect to a certified historic structure while
extending the credit period from one year to five years, but nowhere in
the Conference Report or the Bluebook is there any suggestion that the
results for taxpayers claiming the rehabilitation credit under the
rules of section 50 were intended to be different. See Conference
Report, at 435-436; Bluebook, at 210. Further, the TCJA made no changes
to section 50. Accordingly, the proposed regulations generally place
taxpayers claiming the rehabilitation credit after the TCJA in the same
position with respect to the rules of section 50 as taxpayers prior to
the TCJA. Comments are requested with respect to any specific concerns
taxpayers may have with this plain reading of the operative statutory
text.
Proposed Sec. 1.47-7(e) provides examples that illustrate these
rules with respect to the most relevant fact patterns. In addition to
examples that show the general calculation for claiming the
rehabilitation credit, proposed Sec. 1.47-7(e) demonstrates the
interaction with section 50(a) (recapture in case of dispositions,
etc.), section 50(c) (basis adjustment to investment credit property),
and two examples to illustrate interaction with section 50(d)(5)
(relating to certain leased property when the lessee is treated as
owner and subject to an income inclusion requirement). The first
example illustrating the interaction with section 50(d)(5) describes a
transaction in which the lessee is a corporation, and in the second
example the lessee is a partnership that is subject to special rules
under Sec. 1.50-1(b)(3)(i).
The Treasury Department and the IRS request comments on these
examples and whether any additional examples illustrating the
coordination of section 47 with other provisions of the Code and
regulations are necessary. The Treasury Department and the IRS are
aware that other provisions of the Code and regulations require
computations that are impacted by the amount of the rehabilitation
credit determined with respect to a QRB and the adjusted basis of a
QRB. The Treasury Department and the IRS also request comments
regarding whether special rules are needed to address how the amount of
the rehabilitation credit determined and the adjusted basis of a QRB
interact with those other provisions of the Code and regulations.
Proposed Applicability Date
These regulations are proposed to apply to taxable years beginning
on or after the date the Treasury decision adopting these regulations
as final regulations is published in the Federal Register. Taxpayers
may rely on these proposed regulations for QREs paid or incurred after
December 31, 2017, in taxable years beginning before the date the
Treasury decision adopting these regulations as final regulations is
published in the Federal Register, provided the taxpayers follow the
proposed regulations in their entirety and in a consistent manner.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter
6), it is hereby certified that these proposed regulations will not
have a significant economic impact on a substantial number of small
entities. Although the rules may affect small entities, data are not
readily available about the number of taxpayers affected. The economic
impact of these regulations is not likely to be significant, however,
because these proposed regulations substantially incorporate statutory
changes made to section 47 by the TCJA that have been effective for
QREs paid of incurred after December 31, 2017. The proposed regulations
will assist taxpayers in understanding the changes to section 47 and
make it easier for taxpayers to comply with those changes and section
50, which was not changed by the TCJA. Notwithstanding this
certification, the Treasury Department and the IRS welcome comments on
the impact of these regulations on small entities.
Pursuant to section 7805(f) of the Internal Revenue Code, these
regulations will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small
business.
Comments and Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments that are
submitted timely to the IRS as prescribed in the preamble under the
ADDRESSES section. The Treasury Department and the IRS request comments
on all aspects of the proposed regulations. Any electronic comments
submitted, and to the extent practicable any paper comments submitted,
will be made available at www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
[[Page 31099]]
Drafting Information
The principal author of these proposed regulations is Barbara J.
Campbell, Office of the Associate Chief Counsel (Passthroughs and
Special Industries), IRS. However, other personnel from the Treasury
Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.47-7 is added to read as follows:
Sec. 1.47-7 Rehabilitation credit allocated over a 5-year period.
(a) In general. For purposes of section 46, for any taxable year
during the 5-year period beginning in the taxable year in which a
qualified rehabilitated building, as defined in section 47(c)(1) and
Sec. 1.48-12(b), is placed in service, the rehabilitation credit for
the taxable year is an amount equal to the ratable share for the
taxable year, provided the requirements of section 47 are satisfied.
Except as provided by section 13402(c)(2) of Public Law 115-97, 131
Stat. 2054 (2017), this section applies with respect to qualified
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.
1.48-12(c), paid or incurred after December 31, 2017.
(b) Ratable share. For purposes of paragraph (a) of this section,
the term ratable share means, for any taxable year during the 5-year
period described in such paragraph, the amount equal to 20 percent of
the rehabilitation credit determined with respect to the qualified
rehabilitated building, allocated ratably to each year during such
period.
(c) Rehabilitation credit determined. The term rehabilitation
credit determined means the amount equal to 20 percent of the qualified
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.
1.48-12(c), taken into account under section 47(b)(1) for the taxable
year in which the qualified rehabilitated building is placed in
service. However, if the taxpayer claims the additional first year
depreciation for the qualified rehabilitation expenditures pursuant to
Sec. 1.168(k)-2(g)(9), the term rehabilitation credit determined means
the amount equal to 20 percent of the remaining rehabilitated basis, as
defined in Sec. 1.168(k)-2(g)(9)(i)(B), of the qualified
rehabilitation building for the taxable year in which such building is
placed in service.
(d) Coordination with section 50. For purposes of section 50 and
Sec. 1.50-1, the amount of the rehabilitation credit determined is the
amount defined in paragraph (c) of this section.
(e) Examples. The provisions of paragraphs (a) through (d) of this
section are illustrated by the following examples. Assume that the
additional first year depreciation deduction provided by section 168(k)
is not allowed or allowable for the qualified rehabilitation
expenditures.
(1) Example 1: Rehabilitation Credit Determined and Ratable
Share. Between February 1, 2021 and October 1, 2021, X, a calendar
year C corporation, incurred qualified rehabilitation expenditures
of $200,000 with respect to a qualified rehabilitated building. X
placed the building in service on October 15, 2021. X's
rehabilitation credit determined in 2021 under paragraph (c) of this
section is $40,000 ($200,000 x 0.20). For purposes of section 46,
for each taxable year during the 5-year period beginning in 2021,
the ratable share allocated under paragraph (b) of this section for
the year is $8,000 ($40,000 x 0.20).
(2) Example 2: Coordination with section 50(c). The facts are
the same as in paragraph (e)(1) of this section (Example 1). For
purposes of determining the amount of X's basis adjustment in 2021
under section 50(c), the amount of the rehabilitation credit
determined under paragraph (c) of this section is $40,000.
(3) Example 3: Coordination with section 50(a). The facts are
the same as in paragraph (e)(1) of this section (Example 1). In 2021
and 2022, X claimed the full amount of the ratable share allowed
under section 46, or $8,000 per taxable year. X's total allowable
ratable share for 2023 through 2025 is $24,000 ($8,000 allowable per
taxable year). On November 1, 2023, X disposes of the qualified
rehabilitated building. Under section 50(a)(1)(B)(iii), because the
period of time between when the qualified rehabilitated building was
placed in service is more than two, but less than 3 full years, the
applicable recapture percentage is 60%. Based on these facts, X has
an increase in tax of $9,600 under section 50(a) ($16,000 of credit
claimed in 2021 and 2022 x 0.60) and has $3,200 of credits remaining
in each of 2023 through 2025, after forgoing $4,800 in credits in
each of the years 2023 through 2025 ($8,000 x 0.60).
(4) Example 4: Coordination with section 50(d)(5) and Sec.
1.50-1; C corporation lessee. X, a calendar year C corporation,
leases nonresidential real property from Y. The property is a
qualified rehabilitated building that is placed in service on
October 15, 2021. Under paragraph (c) of this section, the amount of
the rehabilitation credit determined is $100,000. Y elects under
Sec. 1.48-4 to treat X as having acquired the property. The
shortest recovery period that could be available to the property
under section 168 is 39 years. Because Y has elected to treat X as
having acquired the property, Y does not reduce its basis in the
property under section 50(c). Instead, pursuant to section 50(d)(5)
and Sec. 1.50-1, X, the lessee of the property, must include
ratably in gross income over 39 years an amount equal to the
rehabilitation credit determined with respect to such property.
(5) Example 5: Coordination with section 50(d)(5) and Sec.
1.50-1; partnership lessee. A and B, calendar year taxpayers, form a
partnership, the AB partnership, that leases nonresidential real
property from Y. The property is a qualified rehabilitation building
that is placed in service on October 15, 2021. Under paragraph (c)
of this section, the amount of the rehabilitation credit determined
is $200,000. Y elects under Sec. 1.48-4 to treat the AB partnership
as having acquired the property. The shortest recovery period that
could be available to the property under section 168 is 39 years.
Because Y has elected to treat the AB partnership as having acquired
the property, Y does not reduce its basis in the building under
section 50(c). Instead, A and B, the ultimate credit claimants, as
defined in Sec. 1.50-(b)(3)(ii), must include the amount of the
rehabilitation credit determined under paragraph (c) of this section
with respect to A and B ratably in gross income over 39 years, the
shortest recovery period available with respect to such property.
(f) Applicability date. These regulations are proposed to apply to
taxable years beginning on or after the date the Treasury decision
adopting these regulations as final regulations is published in the
Federal Register.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-09879 Filed 5-21-20; 8:45 am]
BILLING CODE 4830-01-P
