On Dec. 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act (the “Act”), enacting broad reforms to the Internal Revenue Code. In previous BakerHostetler Alerts published Nov. 8 and Nov. 10, we outlined the potential impact on New Markets Tax Credits (“NMTCs”) and Historic Tax Credits (“HTCs”) under the legislative proposals that had been passed by the House and Senate, respectively. A congressional conference committee convened to reconcile the provisions of the separate House and Senate bills, the result of which is the Act. The Act largely tracks the final Senate bill with respect to NMTCs and HTCs. It retains the NMTC program through its 2019 allocation round, and it maintains the HTC program with some limitations and revisions. Other provisions of the Act will also have a collateral effect on NMTCs and HTCs.

New Market Tax Credits

Under prior law, the NMTC program, provided under Section 45D of the Code, was authorized through the 2019 round, with $3.5 billion of NMTC allocations available for each annual round. The House bill would have eliminated the 2018 and 2019 allocation rounds that were previously authorized under the PATH Act in December 2015. The Senate bill did not address NMTCs, leaving prior law relating to NMTCs unaffected by the Act.

Fortunately, the Act follows the Senate bill and does not adopt the House bill’s effective repeal of the NMTC. Accordingly, Section 45D of the Code remains unchanged, with $3.5 billion in NMTC allocations available for each of the 2017, 2018 and 2019 calendar year rounds. This includes the $3.5 billion of NMTC awards from the 2017 allocation round that are expected to be announced in the next month or so. Industry participants will continue their historical efforts to extend or make permanent the NMTC program through future tax extender bills and other legislative efforts.

Historic Tax Credits

Under prior law, Section 47 of the Code provided HTCs in the amount of (i) 20 percent of qualified rehabilitation expenditures (“QREs”) incurred with respect to certified historic structures and (ii) 10 percent of QREs incurred with respect to pre-1936 buildings that are not certified historic structures. The House bill would have repealed Section 47 of the Code, eliminating HTCs for all QREs paid or incurred after Dec. 31, 2017, subject to a transition rule. The Senate bill called for a repeal of the 10 percent credit available with respect to pre-1936 buildings. The Senate bill retained the 20 percent credit for QREs incurred with respect to certified historic structures, but also provided that the HTCs must be claimed ratably over a five-year period for QREs paid or incurred after Dec. 31, 2017, subject to a transition rule.

The Act predominantly follows the Senate bill with respect to HTCs. Thus, the 10 percent credit for pre-1936 buildings no longer exists and the 20 percent credit for certified historic structures remains, but must be claimed ratably over a five-year period. These revisions are effective for QREs paid or incurred after Dec. 31, 2017, subject to a transition rule.

The transition rule provides that QREs with respect to either certified historic structures or pre-1936 buildings that are owned or leased by the “taxpayer” during the entirety of the period after Dec. 31, 2017 will continue to generate HTCs as under prior law, provided that the taxpayer’s 24-month measuring period (or 60-month period, in the case of phased rehabilitations) begins not later than 180 days after the enactment of the Act (i.e., June 20, 2018). Even for those taxpayers who qualify for the transition rule, any QREs paid or incurred after the end of the tax year in which the applicable measuring period ends will be subject to the new HTC timing rules. Legislative history suggests that the term “taxpayer” as used in the transition rule refers to the person who undertakes the rehabilitation of the building. Accordingly, in the context of the transition rule, the term “taxpayer” appears to refer to the regarded taxpayer entity (e.g., partnership) that is treated as generating the QREs in connection with the rehabilitation of the building. Thus, in a lease pass-through transaction structure, the “taxpayer” would seem to refer to the lessor. These and other aspects of the new HTC rules are subject to possible further clarification and additional guidance. In addition, the Act’s elimination of partnership technical terminations also could be helpful to taxpayer partnerships that would like to meet the Act’s HTC transition rule, but also would be looking to admit a tax credit investor or another partner after year-end 2017.

Base Erosion and Anti-Abuse Tax (“BEAT”)

Another point of concern in the Act for HTC and NMTC stakeholders is the imposition of the base erosion and anti-abuse tax, or “BEAT,” under Section 59A of the Code. The BEAT applies to corporations (other than RICs, REITs, or S corporations) that meet specified annual gross receipts and base erosion thresholds. The BEAT effectively creates a new form of “alternative minimum tax” for U.S. corporations with significant offshore operations, including some investors in NMTCs and HTCs. Only (i) the research credit under Section 41(a) of the Code and (ii) 80 percent of each of the low-income housing tax credit under Section 42(a) of the Code, the renewable energy production credit under Section 45(a) of the Code, and the energy investment credit under Section 48 of the Code are excluded from the calculation of “regular tax liability” used to calculate the BEAT through the 2025 taxable year, after which the exception for these credits will expire. The NMTC and HTC did not receive any similar favorable treatment and would therefore increase a corporation’s “base erosion minimum tax amount” under Section 59A(b)(1).

Reduction in Corporate Tax Rate

The Act also reduces the corporate tax rate to 21 percent from a maximum of 35 percent under prior law. This will make losses allocated from tax credit transactions less valuable to corporate investors, but also will make taxable income including Section 50(d) income in HTC lease pass-through transactions less costly.

State Tax Credits

With respect to state tax credit programs, because the federal NMTC and HTC programs were left largely intact, the many state NMTC and HTC programs that often closely track their federal counterparts should be left largely unaffected by the Act. Furthermore, states do not necessarily follow the federal statute in terms of when HTCs may be claimed, so it will be important to review the rules of the particular state in any transaction utilizing state credits. In addition, in light of the significant reduction in the federal corporate tax rate, state credits generally should be more valuable to corporate investors after the Act. As a result, state tax credit programs should continue to provide important economic development incentives and sources of financing to projects, much as they have done in the past.


While proposals from the House raised significant concerns in the industry about the prospects for the NMTC and HTC programs under tax reform, the Act makes no change to the NMTC and retains the 20 percent HTC. Although HTCs must now be claimed ratably over a five-year period unless a project qualifies under the transition rule, the HTC program remains a valuable preservation incentive, tool for economic development, and source of financing. Nevertheless, the overall effect of the Act, including the BEAT, on investor demand for and pricing of federal NMTCs and HTCs remains to be seen. Similarly, the possible impact of the lower federal corporate tax rate on investor demand for and pricing of both federal and state tax credit investments in the market also remains to be seen.