Michigan’s new historic tax credit: Your FAQ

The Michigan legislature recently reinstated the state’s popular HTC program after being eliminated with other incentives in 2011. The following FAQ provides an overview of the new program and the process for claiming credits.

How are Michigan HTCs calculated?

Michigan HTCs can be claimed on 25% of qualified rehabilitation expenditures (QREs), as defined for federal HTC purposes.

Michigan QREs can include expenditures on properties not eligible for federal HTCs, including:

• Property transferred after being placed in service (e.g., condo sales)
• Tax-exempt use property
• Buildings designated as historic locally but not nationally
• Nonbuilding historic resources

Michigan HTCs can be claimed on 25% of qualified rehabilitation expenditures (QREs), as defined for federal HTC purposes.

Michigan QREs can’t exceed the preapproval amount unless credit capacity remains and the State Historic Preservation Office (SHPO) approves a request for additional credits.

When can Michigan HTCs be claimed?

Michigan HTCs can be claimed upon issuance of a certificate of completed rehabilitation by the SHPO, even if the project’s federal HTCs are claimed over five years.

Qualified taxpayers must initially claim credits within five years after receiving a certificate of completed rehabilitation.

Projects receiving a certificate of completed rehabilitation after Dec. 31, 2030, aren’t eligible to receive a credit.

What taxes can Michigan HTCs be used to offset?

Michigan HTCs can offset Michigan corporate or individual income tax.

Can Michigan HTCs be assigned or transferred?

Michigan HTCs may be freely assigned and reassigned in the year the certificate of completed rehabilitation is issued.

A pass-through entity’s Michigan HTCs may be claimed against its owners’ tax liability based on their proportionate ownership or an alternative method approved by the SHPO.

When are Michigan HTCs subject to recapture?

Michigan HTCs vest pro rata over a five-year compliance period, at a rate of 20% per year. During this period, assignors retain the recapture risk. Michigan HTC recapture is triggered upon:

• Part 3 approval revocation, including upon destruction of building (e.g., fire).
• Transfer of ownership of all or part of the building unless the seller and state enter into a written agreement providing:
  • Reasonable assurance the property will remain historic for the five-year compliance period.
  • A method for the state to recover nonvested credits from the qualified taxpayer.
  • A title restriction requiring the resource to remain historic for the five-year compliance period.
  • The qualified taxpayer pays all fees associated with the written agreement.

What projects are eligible for Michigan HTCs?

Eligible resources include publicly or privately owned historic buildings, structures, sites, objects, features or open spaces that are:

• Individually listed on the national or state register of historic places.
• Contributing resources located within a national, state, or local historic district.

Nonincome-producing property (e.g. an owner-occupied home) is eligible for HTCs.

Rehabilitation must conform with the secretary of interior’s standards for rehabilitation, which may increase construction costs.

Minimum QREs:

• Nonresidential: 10% of state equalized value (SEV) or 5% of appraised value
• Residential: $1,000

Rehabilitation must begin within one year of preapproval and must be completed within eight years.

Are projects undergoing rehabilitation eligible to apply for Michigan HTCs?

Projects that commenced rehabilitation are eligible for Michigan HTCs if they haven’t received a certificate of completed rehabilitation before 2021. 

What is the Michigan HTC application process?

Applicants must submit an application and receive preapproval to claim Michigan HTCs. They’re reviewed on a first-come, first-served basis. In addition:

• The SHPO must approve or deny completed applications within 120 days.
• After the statewide cap is met, the SHPO must notify applicants that no additional preapproval letters will be issued for the calendar year. The SHPO must also notify applicants of their application’s priority number, which will be used for two years to award additional credits becoming available the following year and from preapproval rescissions.
• LLCs can apply even though they’re not required to file a Michigan tax return.

Applicants must submit an application and receive preapproval to claim Michigan HTCs. They’re reviewed on a first-come, first-served basis.

When will the SHPO start accepting applications?

Before finalizing the application process, the state is required to go through a public rule-making process, which will have a public comment period; consequently applications will likely not be available until spring 2021.

What are the odds an application will be approved?

The statute includes several low annual caps, including an annual $5,000,000 statewide Michigan HTC cap, allocated as follows:

• $2,000,000 for large nonresidential projects (QREs more than $2,000,000)
• $2,000,000 for small nonresidential projects (QREs less than $2,000,000)
• $1,000,000 for residential projects (non-income-producing owner-occupied residences)

Factors to consider:

• Nonresidential projects include all income-producing rental properties, including residential rentals.   
• The per-project-per-year cap is $2 million.
• Large nonresidential project credits will be the most competitive. The first application submitted will likely be the only project to receive an award in that category.
• Small nonresidential projects will have a better chance.
• Residential projects will have the best odds.

Subsequent legislation could increase annual caps.

How does claiming or selling Michigan HTCs impact taxes?

Applying tax credits against state tax liability will reduce federal tax deductions because state tax payments are reduced. Proceeds from the sale of Michigan HTCs to a third party are generally regarded as taxable income.

What’s changed compared to the previous program?

There are several changes to be aware of:

• Michigan HTC is no longer reduced by Federal HTCs.
• The new Michigan HTC has low annual caps. Previously, capacity was determined as follows:
  • Base HTC was usually 5% of QREs (25% of QREs less federal HTCs) with no cap. Preapproval wasn’t required.
  • “Enhanced” credits up to 15% of QREs were awarded annually subject to a statewide cap, which increased annually. The highest annual cap was $12 million.
  • Two high community impact projects per year received a “special consideration” credit up to 15% of QREs. No more than $3 million could be claimed each year with unused credits carrying forward.
• Michigan HTCs are no longer refundable, but they can be carried forward 10 years.
• The new program sunsets for projects completed after 2030, whereas previous Michigan HTCs were permanent.
• Preapprovals now are rescinded if rehabilitation doesn’t begin within one year. Previously, the state could revoke preapprovals for lack of substantial progress toward completion or if they determined the rehabilitation plan couldn’t be completed.

Anything else?

Reinstating Michigan HTCs at 25% of QREs is great news for Michigan’s preservation and development communities. For more information about the new program and how it can benefit your rehabilitation project, give us a call.