Survey of North Carolina and Federal Tax Incentives for Real Property Investment and Disposition Conducive to Arts-Driven Economic Development

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1 Survey of North Carolina and Federal Tax Incentives for Real Property Investment and Disposition Conducive to Arts-Driven Economic Development Note: This survey is an outline of statutes and regulations for general use and discussion. It is neither comprehensive nor intended to serve in any way as legal or financial advice. Each individual and entity s tax situation is unique, and each should consult its own legal and financial advisors prior to making any decisions regarding these or any other tax incentives. 1. Tax Incentives for Rehabilitating Historic Structures A. NC Credit for Rehabilitating an Income Producing Historic Structure (NCGS Sec ). If the taxpayer is allowed a federal income tax credit under IRC Sec. 47, then the taxpayer is allowed a credit equal to i. 20% of qualified rehabilitation expenses under IRC Sec. 47, which are generally the costs of capital improvements associated with the substantial rehabilitation of a building first put into service before the beginning of that rehabilitation, depreciated by the straight line method, upon a Certified historic structure under IRC Sec. 47, which is a building: (1) Listed in the National Register of Historic Places, or (2) Located in a registered historic district and is certified by the U.S. Secretary of the Interior as being of historic significance to the district. A registered historic district is: Places, or Any district in the National Register of Historic (B) Any district designated by a state or local statute that is certified by the U.S. Sec. of the Interior as: (i) containing criteria that substantially achieve the purpose of preserving and rehabilitating buildings of historic significance to the district, and (ii) meeting substantially all of the requirements for the listing of districts in the National Register of Historic Places, the rehabilitation of which structure is i Certified by the NC Historic Preservation Office as in accordance with requirements (i) and (ii) above. iv. Forfeiture for Disposition of the Income Producing Historic Structure. A taxpayer who is required under IRC Sec. 50 to recapture all or part of the federal credit for rehabilitating an income-producing historic structure forfeits the corresponding part of the NC tax credit regarding that income-producing historic structure. v. Forfeiture of NC credit for Change in Ownership. An owner of a pass-through entity holding an income-producing historic structure forfeits all or part of the PPAB v1

2 owner s NC tax credit if the owner disposes of its interest in the pass-through entity within 5 years from the date that the historic structure was placed of service of eligible site and disposition is of more than 1/3 of that owner s initial interest. B. NC Credit for Rehabilitating a Non Income Producing Historic Structure (NCGS Sec ). If the taxpayer is not allowed a federal income tax credit under IRC Sec. 47, then the taxpayer is allowed a credit equal to: i. 30% of the rehabilitation expenses, which are expenses (1) Of at least $25,000.00, (2) Incurred for repairs or alterations certified by the State Historic Preservation Office as consistent with the U.S. Sec. of the Interior s Standards for Rehabilitation, and (3) Added to the property s basis, for A State-certified historic structure, which is a structure (1) Listed in the National Register of Historic Places, or (2) Certified by the NC Historic Preservation Office as contributing to the historic significance of a: National Register Historic District or (B) Locally designated historic district certified by the U.S. Department of the Interior, the rehabilitation of which structure is i Certified by the NC Historic Preservation Office as in accordance with requirements (i) and (ii) above. C. NC credit: i. must be taken against NC income taxes in 5 equal installments beginning with the tax year in which the eligible site is placed into service, i may be carried forward for the succeeding five years to the extent not exhausted by those first 5 annual installments, and iv. is limited in each year to the amount of the tax against which it is claimed, reduced by the sum of all credits allowed, except payments of tax made on or behalf of the taxpayer, D. Sunset in NC for incurring qualified rehabilitation expenses (for rehabilitating an income producing historic structure) and rehabilitation expenses (for rehabilitating a non-income producing historic structure) is January 1, PPAB v1 2

3 E. Federal Income Tax Credit for Rehabilitation of Buildings (IRC Sec. 47). historic structure. i. 20% of the qualified rehabilitation expenditures for a certified 10% of the qualified rehabilitation expenditures for any other qualified rehabilitated building: (1) Substantially rehabilitated, framework, and (2) Substantial retention of exterior walls and internal (3) First placed in service prior to i Carryforward of up to 15 years. 2. NC Mill Rehabilitation Tax Credit (NCGS Sec A) A. Eligible site. A site that: i. Was used as a manufacturing facility or for purposes ancillary to manufacturing, as a warehouse for selling agricultural products, or as a public or private utility, Is a certified historic structure or a State-certified historic structure: (1) Certified historic structure (Federal, IRC Sec. 47): Listed in the National Register of Historic Places, or (B) Located in a registered historic district and is certified by the U.S. Secretary of the Interior as being of historic significance to the district. A registered historic district is: Historic Places, or (i) Any district in the National Register of (ii) Any district designated by a state or local statute that is certified by the U.S. Sec. of the Interior as: 1. containing criteria that substantially achieve the purpose of preserving and rehabilitating buildings of historic significance to the district, and 2. meeting substantially all of the requirements for the listing of districts in the National Register of Historic Places, (2) State-certified historic structure (NCGS Sec (b)(3): Listed in the National Register of Historic Places, or PPAB v1 3

4 (B) Certified by the NC Historic Preservation Office as contributing to the historic significance of a: by the U.S. Department of the Interior, and (i) (ii) National Register Historic District or locally designated historic district certified i Has been at least eighty percent (80%) vacant for at least two years immediately preceding the date the eligibility certification is made. B. Credit for Income Producing Rehabilitated Mill Property i. Federal tax credit must be allowed for qualified rehabilitation expenditures of at least $3,000,000 for the certified rehabilitation of an eligible site. (1) Qualified rehabilitation expenditures under IRC 47(c)(2). (2) Certified rehabilitation Repairs or alteration certified by the NC Historic Preservation Office as consistent the U.S. Sec. of the Interior s Standards for Rehabilitation. Amount of NC tax credit: (1) Equals the percentage of the expenditures that qualify for the federal tax credit, percentage determined by the development tier (NC Dept. of Commerce) of the county in which the eligible site is located (list attached): rehabilitation expenditures. rehabilitation expenditures. (B) Development Tier 1 or 2 40% of the qualified Development Tier 3 30% of the qualified i When NC credit may be claimed: (1) In the year in which the eligible site is placed into service. (2) When the eligible site is placed into service in two or more phases in different years, the amount of credit that may be claimed in a year is the amount based on the qualified rehabilitation expenditures associated with the phase placed into service during that year. iv. Annual Cap on Credit - The amount of the tax against which it is claimed reduced by the sum of all credits allowed, except for payment of tax made on or behalf of the taxpayer. v. Carryforward of Credit Any unused portion of the credit may be carried forward for 9 successive years. PPAB v1 4

5 C. Credit for non-income producing rehabilitated mill property. 47 of the IRC. i. For a taxpayer not allowed a federal income tax credit under Sec. For a taxpayer making rehabilitation expenses of at least $3,000,000 on the certified rehabilitation of an eligible site. i Must be taken in 5 equal installments beginning with the tax year in which the eligible site is placed into service. iv. Amount of NC Credit expenditures. (B) Development Tier 1 or 2 40% of the rehabilitation Development Tier 3 None. v. When the eligible site is placed into service in two or more phases in different years, the amount of credit that may be claimed in a year is the amount based on the qualified rehabilitation expenditures associated with the phase placed into service during that year. D. Type of NC Credit i. may be claimed against the NC income tax, the NC franchise tax (upon privilege of engaging in business in NC), or the NC gross premiums tax (against insurers, HMO s and self-insurers). Taxpayer must elect the tax against which a credit will be claimed when filing the first return on which it is claimed. the credit. i Election is binding for year of election and any carryforwards of iv. Credit may not be claimed for the same activity under historic preservation and mill rehabilitation. E. Allocation of NC credit among owners of a pass-through entity in entity s discretion so long as an owner s adjusted basis is at least 40% of the credit allocated to that owner. F. Forfeiture of NC credit by an owner of a pass-through entity if owner disposes of its interest within 5 years from date of service of eligible site and disposition is of more than 1/3 of that owner s initial interest. G. Sunset to apply for eligibility certification is January 1, Tax Incentives for Development of Improvements on NC Brownfields (NCGS Sec ) PPAB v1 5

6 A. Prerequisites i. Brownfields Agreement Completion of Qualifying Improvements improvements made to real property that is subject to a brownfields agreement B. Commencing on the first tax year after completion of improvements C. Exclusion of Appraised Value of Qualifying Improvements from Ad Valorem Tax Valuations: i. Year 1 90% of Appraised Value Excluded Year 2 75% of Appraised Value Excluded i Year 3 50% of Appraised Value Excluded iv. Year 4 30% of Appraised Value Excluded v. Year 5 10% of Appraised Value Excluded 4. Tax Incentives for Conservation of Spaces and Structures that Support the Arts A. Bargain sales and donations of entire real property interests to governmental entities and 501(c)(3) organizations are generally charitable contributions deductible from federally taxable income (IRC 170(b) i. For individuals, limited to 30% of adjusted gross income in the year of donation, with a 5 year carryforward. carryforward. For corporations, limited to 10% of taxable income, with a 5 year B. Bargain sales and donations of real property interests under IRC 170(h) are for the conveyances of i. Entire interests, remainders and conservation easements To a governmental entity or a 501(c)(3) organization committed to protect the conservation purposes of a donation and having the resources to enforce the restrictions of the donation including: i Exclusively for conservation purposes protected in perpetuity, (1) preservation of land areas for outdoor recreation by, or the education of the public, and generally ensuring some form of public access to the property, (2) the preservation of an historically important and independently significant land area, PPAB v1 6

7 (3) the preservation of a certified historic building Listed in the National Register of Historic Places or (B) Located in a registered historic district and certified by the U.S. Sec. of the Interior as being of historic significance to the district, per IRC Sec. 47(c)(3)(B), iv. federally taxable income: and are generally charitable contributions deductible from (1) For individuals, limited to 50% of adjusted gross income with a 15 year carryforward, and year carryforward, and (2) For corporations, limited to 10% of taxable income with a 5 v. are generally eligible for NC income tax credits (1) For an individual equal to 25% of the fair market value of the donated property interest, not in excess of $250,000.00, with a 5 year carryforward, (2) For a pass-through entity equal to 25% of the fair market value of the donated property interest, not in excess of $500,000.00, with a 5 year carryforward, and (3) For a corporation that is an owner of a pass-through entity, equal to the owner s allocated share of the credit, not in excess of $500,000, with a 5 year carryforward. PPAB v1 7

8 2011 County Tier Designations for Tax Credits County 2011 Tier County 2011 Tier Alamance 2 Johnston 3 Alexander 1 Jones 1 Alleghany 1 Lee 2 Anson 1 Lenoir 1 Ashe 2 Lincoln 2 Avery 2 Macon 2 Beaufort 1 Madison 2 Bertie 1 Martin 1 Bladen 1 McDowell 1 Brunswick 3 Mecklenburg 3 Buncombe 3 Mitchell 1 Burke 1 Montgomery 1 Cabarrus 3 Moore 3 Caldwell 1 Nash 2 Camden 1 New Hanover 3 Carteret 3 Northampton 1 Caswell 1 Onslow 3 Catawba 2 Orange 3 Chatham 3 Pamlico 2 Cherokee 1 Pasquotank 2 Chowan 2 Pender 3 Clay 1 Perquimans 2 Cleveland 1 Person 2 Columbus 1 Pitt 2 Craven 3 Polk 2 Cumberland 2 Randolph 2 Currituck 2 Richmond 1 Dare 2 Robeson 1 Davidson 2 Rockingham 1 Davie 2 Rowan 2 Duplin 2 Rutherford 1 Durham 3 Sampson 2 Edgecombe 1 Scotland 1 Forsyth 3 Stanly 2 PPAB v1

9 Franklin 2 Stokes 2 Gaston 2 Surry 1 Gates 1 Swain 1 Graham 1 Transylvania 2 Granville 2 Tyrell 1 Greene 1 Union 3 Guilford 3 Vance 1 Halifax 1 Wake 3 Harnett 2 Warren 1 Haywood 2 Washington 1 Henderson 3 Watauga 2 Hertford 1 Wayne 2 Hoke 2 Wilkes 1 Hyde 1 Wilson 2 Iredell 3 Yadkin 2 Jackson 2 Yancey 2 PPAB v1 9