The most common form of wealth stems from active income, money earned from performing a service. This is capital made from but is not exclusive to jobs providing salaries, tips, or commission. But many times, the public hears of enigmatic stories about immense financial growth through various means of passive income.
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.
Once a year we all get that cringeworthy feeling when we need to write a check to the IRS. As real estate professional or an investor with passive income we all know that feeling of … “Where did my money go?”
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.
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).
With the advent of the internet, social media, and the growing popularity of blogs, a relatively new source of passive income has emerged. Today, “affiliate marketing” which is typically generated when targeted advertisements are placed on high traffic websites, has become a major revenue source for individuals with popular websites and blogs. When readers click advertisement links and/or make purchases from a website, the operator of the site makes a small profit, hence the term, “affiliate marketing”. For popular sites, this profit can accumulate into quite a substantial amount of passive income.
Special To Banker & Tradesman
The Federal ITC was first signed into law as a part of the Revenue Act of 1962, and was created with the intention to stimulate economic growth in the United States by providing incentives for businesses to purchase or modernize certain assets. Today this fundamental goal of the Federal ITC remains the same, though the ITC now has a focus of stimulating private investment in renewable energy infrastructure. Since its original enactment, the Federal ITC has gone through several changes. It has been suspended, extended, and terminated several times, and the size of the federal tax credit has fluctuated significantly due to tax reform acts from various political climates.
State, Federal Offsets Help Recover Costs In Tight Times
Many developers tend to think “traditional” when it comes to commercial real estate financing sources, resulting in a scramble to obtain the funds necessary to finance a project. Without knowledge of how to secure available federal and state tax credits specific to projects, developers unwittingly “leave money on the table.”
Tax credits allow a dollar-for-dollar offset against taxes due. As such, they act as a form of tax payment. Tax credits are not to be confused with a tax deduction, which reduces adjusted gross income and can lessen the tax due. Tax credit recipients can use the credit to offset taxes, or can sell the credit in order to gain income. Restrictions, limitations, recapture risk, compliance obligations and transferability of the tax credit are dependent on the type of tax credit issued.
A variety of tax credits exist, including those for historical remediation, low-income housing, renewable energy and brownfields projects.
Historic rehabilitation tax credits promote the rehabilitation of historic buildings by the private sector. This is one of the nations’ most successful and cost-effective community revitalization programs, as historic renovations – which are extremely expensive – may not otherwise be undertaken without this tax credit.
State and federal historical rehabilitation tax credits together can offset as much as 40 percent of a construction project’s budget and they can make or break the feasibility of resurrecting a building with significant community value. With these credits, preservation efforts are more economically appealing than replacement costs. Likewise, being designated as a historic place may increase property values, thereby enhancing the property’s economic bottom line.
The market for tax credits allows for the completion of often essential projects that might not otherwise see the light of day due to the difficulty of financing through traditional funding avenues.
It is important to note that the process of applying for, securing and monetizing tax credit awards is an information and document sensitive process which is enhanced by using a consultant, a broker or a syndicator, and at times a lawyer to complete the paperwork.
Energy Credit Revenue
There are two significant tax credits for renewable energy projects – investment tax credits (ITC) from capital investments in the technology and/or the facility that creates renewable energy; and renewable energy credits (RECs) that are generated as a result of the production of renewable energy.
ITCs amount to 30 percent of the project capital costs, whereas the REC formula is organic – for each megawatt hour of electricity a renewable energy project generates, the owner receives one REC. These RECs can then be sold, allowing the producer of the renewable energy to reap revenue from the credit.
RECs can be purchased from companies that supply power, natural gas, biomass, and energy products, or from any producer of renewable energy. This source of revenue subsidizes the operating costs of a renewable energy facility, which is necessary to allow said facilities to remain financially feasible. A REC is retired once it is sold, ensuring that the credit is used but once.
Increasingly, businesses are investing in RECs as a means to implement more eco-conscious practices. Purchasing RECs allows a company to support renewable energy development, even when it does not produce renewable energy and is not directly utilizing renewable energy for its consumption needs. RECs are designed to encourage the development and distribution of renewable energy technology and the production of renewable energy.
Recovering Cleanup Costs
Finally, mention needs to be made of the Massachusetts Brownfields Tax Credit. Although some commercial property owners will go out of their way to avoid brownfields sites, others recognize the benefits inherent in the brownfields tax credit, which is intended to encourage the reclamation of polluted property as well as to enhance economic growth by fostering the rehabilitation of abandoned properties.
If the property qualifies for the credit, costs related directly to the environmental clean-up – such as outlays to determine, contain or remove contamination – will apply toward the issuance of credit. By monetizing the credit, often a brownfields property owner that cannot or does not desire to use the tax credit can recover up to 50 percent of the eligible costs of cleaning up the site.
The tax credits outlined above illustrate a sound approach to attracting new investment and financial activity during a challenging economic climate.