Federal Tax Credits

Federal Tax Credits

MPC works with 3 types of federal credits – Solar ITC, Historic, and LIHTC.

Federal Solar Investment Tax Credits (ITC)

Investment Tax Credits are generally used for corporations with large federal tax exposures – $50 million or more. They are one-year credits that are accompanied with five years of depreciation, as well as a five-year compliance/recapture regime. These credits are typically derived from renewable energy projects which also generate opportunities for favorable PR. Generally, these credits are not suitable for individuals.

Credit Benefits:

  • After-tax IRR’s are often extremely high
  • Excess credits can be carried back one year and carried forward for twenty years
  • Recapture is ratably reduced each year during the recapture period

Federal Historic Tax Credits

The Federal Historic Credit program, created by Congress in 1976, is an incentive to rehabilitate qualified historic structures.  The program allows up to 20% of eligible expenses for conversion into tax credits. The federal historic credit is longest tenured transferable tax credit available.

Historic Tax Credits are generally used for corporations with federal liabilities of $30 million or less. They are one year credits with a five year compliance period. Historic tax credits often have no other significant benefit than the credit themselves. Individuals may utilize these credits to the extent their tax liabilities are derived from passive activities, such as real estate.

Credit Benefits:

  • Excess credits can be carried back one-year and carried forward for twenty years
  • Recapture is ratably reduced each year during the recapture period
  • Low Risk: US Trust for Historic Preservation’s latest “Survey on Historic Credit Recapture; 2001-2012” quantified credit recapture risk at .73% of tax credits used

Federal LIHTC

As part of the Tax Reform Act of 1986, the Low-Income Housing Tax Credit (LIHTC) was created to promote the development of affordable rental housing. The LIHTC provides investors a dollar-for-dollar reduction in their federal tax liability for a ten-year period and may be used to satisfy Community Reinvestment Act (CRA) requirements for financial institutions. The equity raised by the sale of the credits is used to finance construction of the property.

Credit Benefits:

  • Federal LIHTCs are typically pooled and syndicated on a proprietary basis or may be syndicated to multiple corporate investors in a given fund.
  • Investments may be used to satisfy CRA requirements.
  • Extremely low risk profile given vigorous underwriting and proactive asset management throughout the 15-year compliance period.
State Tax Credit Exchange will work with a client’s tax advisor to negotiate deal terms to meet the risk tolerances of each investor.