These are exciting times in the tax credit world! In addition to tax cuts, the 2017 Tax Reform brought about other significant changes, including “Opportunity Zones”, which are a new concept that can potentially link tax credit projects and capital gain deferrals in a single deal.
We realized several years ago that large corporations and institutions were so adept at utilizing tax credits that they were using in excess of 90% of all the available tax credits nationwide. By tax credits, I am referring in this case to Investment Tax Credits (“ITC”), which are allowable in Section 38 of the Internal Revenue Code (“IRC”). There are several different ITC’s, including but not limited to the low-income housing tax credit, the historic rehabilitation tax credit, and the renewable energy tax credit.
After digging deeper into this topic, I realized that the Tax Code itself is written in a way that restricts the usage of tax credits to large corporations and institutions by limiting their use by individuals and closely-held companies. Nevertheless, there is a small but significant universe of individual and small company taxpayers that are able to utilize tax credits. We have developed a platform that, over the past few years, has brought to individuals the same tax advantages long utilized to great effect by the large corporations and institutions. We like to think that by doing so we are “changing the game”.
Just as the Trump Organization successfully utilized historic tax credits to completely rehabilitate Washington D.C.’s Old Post Office Pavilion into a new hotel, we successfully utilized tax credits to aid the rehabilitation of the 100-year-old Plymouth Post Office and Courthouse into a mixed-use building, including commercial spaces and residential rental apartments, and passed along the tax credits from the project to individual taxpayers.
It is important to note that tax credits are a dollar-for-dollar offset against a tax obligation, and in that way operates in the same manner as a tax payment. Tax credits can realize a tax savings of 20% and are usually accompanied by depreciation and cash flow which can result in a return of investment well exceeding 30%, and an effective 12% reduction in tax rate. Focusing on tax rate, however, can lead to distortions. I mentioned above that the 2017 Tax Reform provided for a tax cut, yet many, if not most of us, in the upper income brackets might not actually see a tax cut, other than for capital gains. However, it is always more effective to look at tax obligations as a dollar amount rather than as a tax rate. Essentially, a taxpayer with a $1mm tax obligation at the old 39.6% tax rate will still have a $900k+ tax bill even assuming 40% of that liability is taxed at the lower capital gains rates coupled with the new 37% income tax rate.
Furthermore, if the tax credit project was in one of the newly defined “Opportunity Zones” proceeds subject to capital gains taxes that are invested in an Opportunity Zone within 180 days can gain a deferral for 5, 7, or 10 years and a corresponding 10%, 15%, or 100% exclusion from taxes on all appreciation therefrom.
Arguably, these tax credit benefits and capital gains deferrals need to be structured carefully and painstakingly, which is where our platform is so effective. We have laid all the groundwork, and we deliver a platform that is effective and useful for individual taxpayers, and it is an especially good feeling to level the playing field for us little guys vis-à-vis the large corporations and institutions.
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