For some, Tax Credits can be the IDEAL Investment!
No matter whether you view the economy as sluggish, brisk, or flat, several realities are evident, those being that corporate tax rates are at a record "low" of 39%, the highest individual tax rates are 39.6%, and long term capital gains rates are on average 28.6%, when taking into account the federal deductions of state taxes and the phase-out of itemized deductions.
Have you ever thought about investing in federal tax credits but weren’t sure how it works?
The fact that you even are familiar with tax credits and know that they can be an investment opportunity puts you ahead of the curve. Perhaps the biggest barrier to entry with regards to investing in federal tax credits is lack of industry knowledge about tax credits and how strong an investment they can be.
To get started, let’s go over the tax credit basics.
A tax credit is a dollar for dollar credit against taxes owed to the federal government. As a tax credit can be used to offset (or pay) your federal taxes, as if you had written a check to the federal government, a tax credit has a value of $1.00 per tax credit.
Without Congessional action, on December 31, 2016, the Investment Tax Credit (ITC) for renewable energy installations is set to revert back to 10% from its current 30% level.
The ITC has been at 30% since 2008 when recession related legislation kicked in and increased the tax credit to its current level. The 30% tax credit, together with the MACRS rules allowing depreciation of the equipment in full over a 5-year period have stimulated the industry and led to an enormous increase in the installation and generation of renewable energy.
Renewable energy as a source of energy remains a small piece of the overall supply of energy, due to the relative infancy of the industry and the production cost of renewable energy as compared to other sources of power generation.
Infrastructure and equipment costs, such as photovoltaic panels in solar arrays have come down drastically in price, which has narrowed the gap in production costs, but there is still a ways to go. The industry is not at the point yet where it can survive without subsidies, and, therefore, a 30% ITC, as well as more market certainty that the 30% ITC would be around for at least 5-8 years is necessary.
Historical buildings lend themselves very well to multifamily residential use.
When performing an adaptive reuse of a historic building, in addition to the possibility of utilizing historic tax credits (HTC's), if a certain number of the residential units are designated as affordable there may be a possibility to secure low-income housing tax credits (LIHTC's). In such a project, there will need to be a twinning of the two different types of tax credits, and successful completion of the project will hinge on the attention needed to be paid to the structuring of the transaction, the coordination between the requirements of each program, as well as the specific protections needed by the tax equity provider(s) and/or the lender(s).