Recent Changes to Illinois Historic Preservation Tax Credit Program Clear Things Up for Investors | Thompson Coburn LLP
The Illinois Historic Preservation Tax Credit Program is administered by the Illinois State Office of Historic Preservation of the Illinois Department of Natural Resources. This program provides a state income tax credit (the “IL-HTC”) equal to 25% of a project’s qualified rehabilitation expenditures – not to exceed $3 million per project – to owners of certified historic structures that undertake certified rehabilitations. IL-HTC may be claimed to offset income tax imposed on individuals, corporations, trusts and estates.
Developers often seek to sell historic tax credits earned while rehabilitating a historic structure as a source of project financing. However, IL-HTC is not freely transferable between unrelated parties.
Many state tax credit programs that provide non-transferable state tax credits allow a partnership of promoters to “disproportionately allocate” the credits to its partners. This allows investors to buy a small stake (e.g. 1% or 0.01%) in the development partnership, and in return the investor could negotiate to receive an allocation of up to 100% of the credits. state tax.
Until recently, IL-HTC statutes were unclear as to whether IL-HTC could be disproportionately attributed to investors in IL-HTC partnerships.
Specifically, 35 ILCS 31/10(d) provides that:
“[IL-HTCs] granted to a partnership, a limited liability company taxed as a partnership or other multiple owners of property must be transmitted respectively to associates, members or owners on a pro rata basis or under a signed agreement between Partners, Members or Owners documenting any other method of distribution(emphasis added).
This wording suggests that IL-HTC could be disproportionately allocated to owners of a flow-through entity if the disproportionate allocation is agreed to in the flow-through entity’s operating agreement.
On the other hand, until recently, 35 ILCS 5/228 provided that:
“If the taxpayer is a partnership or a subchapter S company, the [IL-HTC] is allowed to partners or shareholders depending on the determination of income and the distributive share of income under Sections 702 and 704 and Subchapter S of the Internal Revenue Code” (emphasis added).
This wording suggests that IL-HTC allocated to a flow-through entity could only be allocated to owners of the flow-through entity based on their ownership percentages. This would effectively prevent an investor who owns a small stake from receiving an allocation of IL-HTC in excess of that small stake (i.e. the owner of a 1% stake could only receive an allocation of 1 % of IL-HTC). HTC).
Thus, 35 ILCS 31/10(d) and 35 ILCS 5/228 appeared to contradict whether an investor in a flow-through entity could receive a disproportionate allocation of IL-HTC.
Effective May 6, 2022, the Illinois Legislature sought to resolve this inconsistency in favor of flexibility, revising 35 ILCS 5/228 to state the following, which is consistent with the wording of 35 ILCS 31/ 10(d):
“If the taxpayer is a partnership, a subchapter S company or a limited liability company, the [IL-HTC] will be granted to partners, shareholders or members in accordance with the determination of income and the distributive share of income under Articles 702 and 704 and subchapter S of the tax code provided that credits extended to a partnership, a limited liability company taxed as a partnership or other multiple owners of property shall be passed on to the partners, partners or owners respectively on a pro rata basis or under a signed agreement between Partners, Members or Owners documenting any other method of distribution(emphasis added).
Accordingly, the Illinois Legislature removed inconsistencies between these statutes and clarified that IL-HTC may be disproportionately awarded pursuant to the terms of an agreement between partners, members, or owners of a flow-through entity. . This should further reassure investors looking to receive a disproportionate allocation of IL-HTC from developer partnerships.