SC – Abandoned Buildings Rehab Tax Credit

 

Nowadays, it seems that most cities, both large and small, have become more focused on revitalizing their downtown areas. Here in Florence, SC, we have seen this first hand with the many projects that have been started in the downtown area.  This includes the recently opened hotel and restaurant which the City sees as a cornerstone to jump starting these revitalization efforts.  One of the many problems with revitalization is that it is usually expensive as developers work to try and balance the historical significance of an area with their need to provide more modern facilities that their new tenants will expect.  Fortunately, here in South Carolina, the State has enacted legislation that may help offset some of those costs.  The recently created credit for the rehabilitation of abandoned buildings may be the very thing which will attract the right kind of developers, allowing these revitalization programs to move forward.  The following article helps explain the credit, and its requirements, in more detail.

James Sheehy, CPA

Via CCH Tax Research:

State Tax Day – Current,S.33,South Carolina—Multiple Taxes: Credit Created for Rehabilitation of Abandoned Buildings,(Jun. 14, 2013)

Recently enacted South Carolina legislation creates a credit for taxpayers who rehabilitate qualified abandoned buildings against either (1) South Carolina corporate or personal income taxes, corporate license fees, taxes on building and loan associations, or a combination thereof, or (2) real property taxes levied by local taxing entities.

The taxpayer must incur the following expenses to qualify for the tax credit:

  • more than $250,000 for buildings located in the unincorporated areas of a county or in a municipality in the county with a population of more than 25,000;
  • more $150,000 for buildings located in the unincorporated areas of a county or in a municipality in the county with a population of at least 1,000, but not more than 25,000; and
  • more than $75,000 for buildings located in a municipality with a population of less than 1,000.

The credit applies only to abandoned building sites or phases or portions thereof put into operation for income-producing purposes. The construction or operation of a charter school, private or parochial school, or other similar educational institution qualifies for the credit. The construction of a single-family residence is not an income-producing purpose and does not qualify for the credit.

The credit provisions are repealed on December 31, 2019. Any carryforward credits will continue to be allowed until the five (income)- or eight (real property)-year time period is completed.

Income Tax Credit

To qualify for the income tax credit, the taxpayer must file a Notice of Intent to Rehabilitate before incurring its first rehabilitation expenses at the building site. The credit amount is determined as follows:

  • if the actual rehabilitation expenses incurred in rehabilitating the building site are between 80% and 125% of the estimated rehabilitation expenses set forth in the Notice of Intent to Rehabilitate, the credit amount is 25% of the actual rehabilitation expenses incurred at the building site;
  • if the actual rehabilitation expenses exceed 125% of the estimated expenses set forth in the Notice of Intent to Rehabilitate, the taxpayer qualifies for the credit based on 125% of the estimated expenses as opposed to the actual expenses it incurred in rehabilitating the building site; and
  • if the actual rehabilitation expenses are below 80% of the estimated rehabilitation expenses, the credit is not allowed.

The entire credit is earned in the taxable year in which the applicable phase or portion of the building site is placed in service but must be taken in equal installments over a five-year period beginning with the tax year in which the applicable phase or portion of the building site is placed in service.

Unused credit may be carried forward for the succeeding five years.

The entire credit earned may not exceed $500,000 for any taxpayer in a tax year for each abandoned building site. This limitation applies to each unit or parcel deemed to be an abandoned building site. Taxpayers that qualify for both this new credit and the credits allowed pursuant to the Textiles Communities Revitalization Act or the Retail Facilities Revitalization Act may only claim one of the three credits.

The credit is limited in use to 50% of either: (1) the taxpayer’s income tax liability for the taxable year if the taxpayer claims the credit as a credit against income tax, or taxes on associations, or both; or (2) the taxpayer’s corporate license fees for the taxable year if the taxpayer claims the credit as a credit against license fees.

A taxpayer may transfer any applicable remaining credit associated with the rehabilitation expenses incurred with respect to that part of the site to the lessee if the taxpayer leases the building site or part of the building site.

Taxpayers that are partnerships or limited liability companies taxed as a partnership may pass the credit through to the partners or members, and the credit may be allocated among any of the partners or members.

Local Property Tax Credit

To qualify for the credit against the local property tax, the taxpayer must file a Notice of Intent to Rehabilitate before incurring its first rehabilitation expenses at the building site.

Once the Notice of Intent to Rehabilitate has been provided to the county or municipality, the municipality or the county first will determine, by resolution, the eligibility of the building site and the proposed rehabilitation expenses for the credit.

A proposed rehabilitation of a building site must be approved by a positive majority vote of the local governing body. If the county or municipality determines that the building site and the proposed rehabilitation expenses are eligible for the credit, there must be a public hearing and the municipality or county will approve the building site for the credit by ordinance.

Before approving a building site for the credit, the municipality or county must first make a finding that the credit does not violate a covenant, representation, or warranty in any of its tax increment financing transactions or an outstanding general obligation bond issued by the county or municipality.

The local real property tax credit is equal to 25% of the actual rehabilitation expenses incurred at the building site multiplied by the local taxing entity ratio of each local taxing entity that has consented to the credit, if the actual rehabilitation expenses incurred in rehabilitating the building site are between 80% and 125% of the estimated rehabilitation expenses set forth in the Notice of Intent to Rehabilitate. If the actual rehabilitation expenses are greater than 125% of the estimated expenses set forth in the Notice of Intent to Rehabilitate, the taxpayer qualifies for the credit based on 125% of the estimated expenses as opposed to the actual expenses it incurred in rehabilitating the building site. However, if the actual rehabilitation expenses are below 80% of the estimated rehabilitation expenses, the credit is not allowed.

The ordinance must provide for the credit to be taken as a credit against up to 75% of the real property taxes due on the building site each year for up to eight years.

The credit against real property taxes for each applicable phase or portion of the building site may be claimed beginning with the property tax year in which the applicable phase or portion of the building site is first placed in service.

A taxpayer may not claim the credit if the taxpayer owned the otherwise-eligible building site when the site was operational and immediately prior to its abandonment.

Definitions

“Abandoned building” is defined as a building or structure, which clearly may be delineated from other buildings or structures, at least 65% of the space in which has been closed continuously to business or otherwise nonoperational for income-producing purposes for a period of at least five years immediately preceding the date on which the taxpayer files a Notice of Intent to Rehabilitate. For purposes of this credit, an abandoned building is not a building or structure with an immediate preceding use as a single-family residence.

However, any portion of the building or structure that was operational and used as a storage or warehouse for income-producing purposes does not qualify for the credit.

“Building site” is defined as the abandoned building together with the parcel of land upon which it is located and other improvements located on the parcel. However, the area of the building site is limited to the land upon which the abandoned building is located and the land immediately surrounding such building used for parking and other similar purposes directly related to the building’s income-producing use.

“Rehabilitation expenses” is defined as the expenses or capital expenditures incurred in the rehabilitation, demolition, renovation, or redevelopment of the building site, including, without limitations, the renovation or redevelopment of existing buildings, environmental remediation, site improvements, and the construction of new buildings and other improvements on the building site.

However, the definition does not include the cost of acquiring the building site or the cost of personal property located at the building site. In order for expenses associated with a building site to qualify for the tax credit, the abandoned buildings on the building site must be either renovated or redeveloped.

Rehabilitation expenses associated with a building site that increases the amount of square footage on the building site in excess of 200% of the amount of square footage of the buildings that existed on the building site as of the filing of the Notice of Intent to Rehabilitate will not be considered rehabilitation expenses for purposes of calculating the amount of the credit. Additionally, demolition expenses will not be considered a rehabilitation expense for purposes of calculating the amount of the credit if the building being demolished is on the National Register for Historic Places.

The “Notice of Intent to Rehabilitate” is a written letter, indicating the taxpayer’s intent to rehabilitate the building site. It must include the location of the building site, the amount of acreage involved in the building site, the amount of square footage of existing buildings involved in the building site, and the estimated expenses to be incurred in connection with rehabilitation of the building site. The notice must also set forth information as to which buildings the taxpayer intends to renovate and whether new construction is to be involved.

H.B. 3093, Laws 2013, effective June 11, 2013, applicable to tax years beginning after 2012.