Change on the Horizon: Updates to the Kentucky Historic Preservation Tax Credit

A major expansion of the Kentucky Historic Preservation Tax Credit may soon become law. On March 15, the Kentucky House of Representatives voted 85 to 2 to pass HB 659, which would amend Kentucky Revised Statute (KRS) 171.397 and increase the maximum credit a taxpayer can claim for residential properties occupied by their owner and commercial properties. The bill, sponsored by Representative Steven Rudy (R), Majority Leader, and Representative David W. Osborne (R), Speaker of the House, will now be introduced in the Kentucky Senate and referred to a standing committee. If the committee favorably reports HB 659, it will receive three readings before a final vote is taken. The bill must pass the Senate by the end of the current legislative session on April 14 and be signed by Governor Andy Beshear to become law.

Extension of the Historic Preservation Tax Credit

HB 659 would double the maximum allowable tax credit for owner-occupied residential properties from $60,000 to $120,000. The most significant change would be to the maximum tax credit allowed for properties that are not owner-occupied residential, increasing the maximum tax credit allowed for such qualifying historic properties from 25 times the previous maximum of $400,000 to $10 million.

Increasing the maximum eligibility for the state historic preservation tax credit for individual taxpayers increases the ability of developers to undertake large historic preservation projects, as the increased project cap allows developers better access to tax credits to mitigate rehabilitation costs.

This bill follows the General Assembly’s expansion of the state’s aggregate annual cap from $5 million to $100 million in 2020. This cap expansion put Kentucky on par with surrounding states. whose programs often offer tens of millions of dollars in credits per year, and in some cases are even uncapped.

Corrective action to allow portability of historical preservation tax credits

In addition to increasing the maximum credits that taxpayers can claim for qualifying historic properties, HB 659 makes an important corrective change to ensure the continued portability of tax credits. The transferability of the credits is important because developers often choose to transfer the credits to financial institutions whose tax liabilities are equal to or greater than the value of the tax credits in exchange for a capital investment in the historic property that is used for historical costs. preservation project.

Currently, KRS 171.397 only allows a taxpayer to transfer or assign the tax credits to a financial institution subject to the banking franchise tax under KRS 136.505. However, prior legislation in 2019 eliminated the bank franchise tax on financial institutions for tax years beginning on or after January 1, 2021. Following repeal, financial institutions are now only subject to corporation tax under KRS 141.040 and limited liability entity tax. under KRS 141.0401.

As a result, previous tax legislation inadvertently limited the transferability of tax credits for tax years beginning on or after January 1, 2021, raising concerns about the continued ability of taxpayers to transfer and monetize the credits. as an additional source of capital for historic preservation. projects. HB 659 corrects this problem by confirming that taxpayers can elect to transfer or allocate tax credits to financial institutions subject to bank franchise tax, corporate income tax and corporation tax. limited liability entities under KRS 136.505, KRS 141.040 and KRS 141.0401, respectively.

Together, these changes are expected to increase demand for historic preservation tax credits and the number of projects Kentucky approves each year.

Eligibility

The Kentucky Historic Preservation Tax Credit, established in 2005, is administered by the state historic preservation office of the Kentucky Heritage Council. For owner-occupied residential properties, 30% of qualifying rehabilitation expenditures are eligible for the tax credit. For all other assets, 20% of eligible rehabilitation expenses are eligible.

Eligible projects must be listed on the National Register of Historic Places. Projects within National Register Districts may also qualify, subject to National Park Service approval, as a Site of Historic Significance. Projects must also meet US Secretary of the Interior standards for the treatment of historic properties to maintain eligibility.

Taxpayers interested in receiving the Kentucky Historic Preservation Tax Credit for projects beginning construction this year should request a preliminary determination of maximum credit eligibility by April 29, 2022.

Conclusion

Frost Brown Todd advises investors, developers, lenders and other key stakeholders on historic preservation transactions across the country. We remain at the forefront of all legislative efforts affecting the industry and are ready to help our clients navigate the changing legislative environment.

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