Recent Changes to Illinois’ Historic Preservation Tax Credit Program Clear Things Up for Investors
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 the 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.