Credit for Qualified Rehabilitation Expenditures For Luxottica Employees

What Is It?

We receive a lot of questions from our Luxottica clients about rehabilitation credit. First, it's important that we start with the basics to ensure that our clients from Luxottica understand fully. So, what is it? The rehabilitation credit is part of the investment tax credit and, thus, is subject to the rules governing the general business tax credit. The tax credit for qualified rehabilitation expense offers two different percentages that depend on the type of building. You can take a credit of 20 percent of qualified rehabilitation expenditures for certified historic structures and 10 percent for qualified rehabilitated buildings that were first placed in service before 1936. A qualified rehabilitation expenditure must be a capitalized expenditure for activities such as reconstruction or constructing an addition or improvement. The credit doesn't apply to the cost of new construction, the cost of acquiring the building, or rehabilitation of any portions of the building that are to be leased to tax-exempt entities or otherwise used for tax-exempt purposes. The expenditure generally must be subject to straight-line depreciation as opposed to other methods.

In general, for amounts paid or incurred after December 31, 2017, the rehabilitation credit is available only for certified historic structures. Under a transition rule, the 10 percent credit for qualified rehabilitated buildings that were first placed in service before 1936 is still available during the 24-month or 60-month period for claiming the credit if (1) the period begins not later than June 20, 2018, and (2) the taxpayer owns or leases the building for the entirety of the period after December 31, 2017.

Technical Note:  We'd like our Luxottica clients to note that while you can claim the 20 percent historic rehabilitation credit for either residential or nonresidential buildings, you can claim the 10 percent credit only for non-residential buildings.

Tip:  The Gulf Opportunity Zone Act of 2005 increased from 20 to 26 percent, and from 10 to 13 percent, respectively, the credit with respect to any certified historic structure or qualified rehabilitated building located in the Gulf Opportunity (GO) Zone, provided the expenses are incurred on or after August 28, 2005 and before January 1, 2009. The Emergency Economic Stabilization Act of  2008 extended this provision through December 31, 2009. The Tax Relief, Unemployment Insurance Reauthorization, and Job  Creation Act of 2010 extended this provision through 2011.

Tip:  Because rehabilitation expenditures qualify for credit as opposed to a deduction, you can directly reduce the amount of income tax owed by the amount of your qualified rehabilitation expenditures. In contrast, deductions only allow you to reduce your taxable income. They don't offset dollar for dollar the amount of income tax owed.

What Types of Buildings Qualify For The Rehabilitation Credit?

In order to qualify for the rehabilitation credit, a building and its structural components must have all of the following characteristics:

• It must have been substantially rehabilitated during the 24-month period ending with or within the year the rehabilitated building is placed in service
• The rehabilitation expenditures must be depreciable or amortizable (systematically spread out over a set period of time)
• It must have been placed in service before the rehabilitation began
• If it's not a certified historic structure, it was first placed in service before 1936
• If it's not a certified historic structure, it retains in place 75 percent or more of both its external walls and its internal structural framework

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Technical Note:  We'd also like our Luxottica clients to note that your rehabilitation expenditures during a 24-month period that you elect, ending with or within the tax year, must be more than the greater of $5,000 or the adjusted basis of the building and its structural components in order for the building to be considered substantially rehabilitated under the Internal Revenue Code. Check IRS Code section 47(c)(1)(A) for more details.

Example(s):  First, say you spend $50,000 to make structural repairs to a historically certified home that you own. Because the property is historically certified, you can claim the credit on a residence and be eligible for a 20 percent or $10,000 credit.

Example(s):  In this example, let's say you spend $200,000 to rehabilitate a historic commercial building that first opened to the public in 1928, although the building isn't historically certified. Of the $200,000 you spent, $50,000 went to rehabilitating the space used by a tax-exempt museum on the first floor. Since the building was placed in service before 1936, but isn't historically certified, it qualifies for a 10 percent credit. You can apply the credit to the $150,000 in expenditures that didn't go toward rehabilitating the tax-exempt museum's space and can claim a credit of $15,000.

Who Can Take Advantage of The Credit?

Both owners and lessees of qualified property can take advantage of the credit for qualified rehabilitation expenditures. Lessees, though, face greater restrictions. We recommend the Luxottica employees who want additional information consult additional sources.