The Tax Cuts and Jobs Act (the “Act”) alters the income tax treatment of certain governmental subsidies, including Tax Increment Financing (“TIF”) proceeds, received by developers after Dec. 22, 2017. This change might result in significant adverse consequences to certain developers who receive TIF proceeds to fund real estate projects. The practical effect is that all developers are now required to treat TIF proceeds received directly by developers as taxable income. Taft has assembled a multi-disciplinary team of tax, public finance and real estate attorneys to assist developer clients in structuring TIF-financed projects to minimize (or possibly eliminate) the impact of this new tax on TIF proceeds.
Previously, Section 118 of the Internal Revenue Code (“Section 118”) characterized the payment of TIF proceeds by governmental entities and civic groups to corporations as non-taxable contributions to capital. Under the Act, however, such contributions by governmental entities and civic groups no longer qualify as contributions to capital under Section 118, and accordingly, any such contributions constitute gross income to the recipient.
As noted above, this change to the tax treatment of TIF proceeds might have significant tax and business consequences for developers who desire to use TIF proceeds in connection with financing projects. TIF proceeds used to construct improvements that will be owned by a governmental entity following development (such as public infrastructure improvements) should remain excludable from taxable income under most circumstances. On the other hand, TIF proceeds from a governmental entity used to construct improvements that will be owned by a private party (such as the developer and any co-investors) generally will be taxable as gross income to the private party.
Various structuring alternatives may be available to mitigate (or possibly eliminate) the economic impact of the new tax liability imposed on recipients of TIF proceeds. The applicability of these potential structures will depend on factual circumstances, such as the nature of the proposed TIF financing, the type of project and the types of costs with respect to a project that are eligible for TIF financing.