Friday, August 23, 2013

New Abandoned Buildings Tax Credit Could be a Gamechanger

South Carolina is on the cutting edge with its newest investment tax credit for the redevelopment of abandoned buildings.  It became the first state to enact an investment tax credit for the redevelopment or rehabilitation of abandoned buildings when it enacted the South Carolina Abandoned Buildings Revitalization Act earlier this year. 

The new act was modeled after the Textile CommunitiesRevitalization Act and works to expand on that incentive to many other types of buildings across the state.  Under the Abandoned Buildings Revitalization Act (the “Act”), any building that has had at least two thirds of its space “…closed continuously to business or otherwise nonoperational for income producing purposes for a period of at least five years…” meets the definition of an abandoned building and is eligible for the tax credit, with the exclusion of single family residences. 

The credit itself is equal to 25% of the rehabilitation costs incurred on the building site, but the credit that may be earned under the Act is limited to $500,000 per tax year, per taxpayer, per building site.  The credit can be used against either (i) South Carolina income taxes, South Carolina corporate license fees, or South Carolina insurance premium taxes; or (ii) real property taxes levied by local taxing entities.  If used against the first category of taxes, the taxpayer can only use the credit to offset up to fifty percent of either (a) the taxpayer’s income taxes or insurance premium taxes, or both; or (b) the taxpayer’s corporate license fees.  If used against the second category of taxes, real property taxes, the taxpayer must get local government approval through the process described in the Act.  In most cases, the cumbersome process of local approval makes the first category of taxes more attractive, because the income tax credits can be syndicated with an investor in order to infuse additional equity into project.  The income tax credit is earned in the year the project is placed in service, but taken in 5 equal annual installments.  Each installment can be carried forward for up to 5 years. 

There are some additional prequalification thresholds a taxpayer must meet in order to qualify for the credit.  First of all, the taxpayer must file a Notice of Intent to Rehabilitate with the Department of Revenue prior to beginning the rehabilitation.  Any costs incurred by the taxpayer before the Notice of Intent is filed will not be eligible for the credit.  The Notice of Intent must state the estimated rehabilitation expenses that will be eligible for the credit, and if the actual expenses claimed are less than 80% of the estimated expenses, the project will not be eligible for the credit at all.  On the other hand, if the actual expenses are greater than 125% of the estimated expenses, the allowed expenses will be limited to 125% of the estimated credits for purposes of calculating the tax credit.  With this in mind, note that it is better to be conservative and underestimate your expenses in order to avoid coming in at less than 80% of projected expenses and losing the credit altogether. 

Another limitation on the credit requires a certain amount of expenditures to be incurred by the taxpayer in the rehabilitation before the project will be eligible for the credit, depending upon where the project is located, and the population of such area.  An area for these purposes is considered to be either a city or, if the area where the project is located is unincorporated, a county.  The thresholds are as follows:
  • For areas with populations of more than 25,000 people, the expenditures on the project must be at least $250,000.
  • For areas with populations of 1,000 to 25,000 people, the expenditures on the project must be at least $150,000.
  • For areas with populations of less than 1,000 people, the expenditures on the project must be at least $75,000. 

This article merely serves as a general summary of the new tax credit law, so if you are interested in utilizing this incentive, you should seek legal counsel who is familiar with these types of incentives. 

The bottom line is that the Abandoned Buildings Revitalization Act adds a dynamic new incentive to encourage redevelopment and revitalization of all types of vacant or abandoned structures across the state of South Carolina.  Whether the developer of a project can use the credit themselves, or it is used as a tool to raise additional capital for the project, the credit adds tremendous value to struggling communities all over the state.

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