In CCA 201641022 (October 7, 2016) (the “CCA”), the IRS issued new guidance regarding filing requirements for pass-through entities (“PTEs”) involved in rehabilitation credit projects. Under this new guidance, (1) a PTE may be required to file Form 3468, Investment Credit, even if the PTE is not the owner of the structure with respect to which the credit is being claimed and (2) a lessor of such property may be required to provide the lessee with certain additional information.
PTEs Now May Be Required to File Form 3468
There are various types of investment credits, including the rehabilitation credit, energy credit, qualifying advanced coal project credit, qualifying gasification project credit, or qualifying advanced energy project credit. See Instructions to Form 3468. Prior to the issuance of the CCA, a pass-through entity was required to file Form 3468 only if it was the owner of the qualified rehabilitated building or certified historic structure with respect to which the credit was claimed. If the entity was the owner, the entity was instructed to complete certain portions of the Form 3468 and attach the form to the entity’s tax return.
Under the CCA, the IRS determined that reporting from PTEs could be required even if the PTEs did not own any property subject to the credit, but merely served as conduits for their ultimate owners to claim the credit. In making this determination, the IRS noted that if it did “not receive reporting from every entity in the ownership chain, it cannot trade the credit from the claimant to the passthrough entity that incurs” the rehabilitation expenses. Owners of PTEs that are involved in investment credit property work should be on the lookout for further guidance from the IRS regarding enhanced filing requirements.
Lessor/Lessee
In certain circumstances, the IRS allows a landlord to elect to pass through a tax credit to the tenant using the property. To pass through the tax credit, the landlord and the tenant must file a statement of election with the tenant, signed by both landlord and tenant, on or before the due date for the tenant’s tax return for the year in which the landlord transfers possession of the property to the tenant. If the election is made, the tenant is treated as having purchased the property from the landlord for fair market value; the tenant must include in income an amount equal to the credit ratably over the recovery period. Prior to the issuance of the CCA, the landlord was not required to provide the tenant with the National Parks Service project number assigned by the Secretary of the Interior, or the date of the final certification of completed work received from the Secretary of the Interior.
When the tenant claims the credit, the tenants must file Form 3468. Form 3468 requires, among other things, the assigned project number and the date of final certification. Accordingly, the IRS has determined that additional information may be required in the election to pass through the credit; specifically, the project number and the final certification date. Landlords that own investment credit property should be on the lookout for further guidance from the IRS regarding enhanced filing requirements.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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