[Federal Register Volume 85, Number 182 (Friday, September 18, 2020)]
[Rules and Regulations]
[Pages 58266-58268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20671]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9915]
RIN 1545-BP56


Rehabilitation Credit Allocated Over a 5-Year Period

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning the 
rehabilitation credit, including rules to coordinate the new 5-year 
period over which the credit may be claimed with other special rules 
for investment credit property. These final regulations affect 
taxpayers that claim the rehabilitation credit.

DATES: Effective Date: These regulations are effective on September 18, 
2020.
    Applicability Date: For date of applicability, see Sec.  1.47-7(f).

FOR FURTHER INFORMATION CONTACT: Barbara J. Campbell, (202) 317-4137.

SUPPLEMENTARY INFORMATION:

Background

    This document amends the Income Tax Regulations (26 CFR part 1) to 
finalize rules under section 47 of the Internal Revenue Code (Code). On 
May 22, 2020, the Department of the Treasury (Treasury Department) and 
the IRS published a notice of proposed rulemaking (REG-124327-19) in 
the Federal Register (85 FR 31096) (proposed regulations). The proposed 
regulations were necessary to address the amendments to section 47 by 
section 13402 of Public Law 115-97, 131 Stat. 2054 (2017), commonly 
referred to as the Tax Cuts and Jobs Act (TCJA). The proposed 
regulations provide that the rehabilitation credit is properly 
determined in the year the qualified rehabilitated building (QRB) is 
placed in service but allocated ratably over the 5-year period 
beginning in such year as required by the TCJA, rather than being 
allocated entirely to the taxable year the QRB is placed in service as 
under section 47 prior to the TCJA. The proposed regulations add Sec.  
1.47-7(a) through (f) and include: A general rule for calculating the 
rehabilitation credit; definitions of ratable share and rehabilitation 
credit determined; and a rule coordinating the changes to section 47 
with the special rules in section 50. The proposed regulations also 
contain examples, including examples illustrating the interaction of 
section 47 with rules in section 50(a) (recapture in case of 
dispositions, etc.), section 50(c) (basis adjustment to investment 
credit property), and section 50(d)(5) (relating to certain leased 
property when the lessee is treated as owner and subject to an income 
inclusion requirement). The preamble to the proposed regulations 
contains a detailed explanation regarding the amendment of section 47 
by the TCJA and the addition of Sec.  1.47-7(a) through (f).
    The Treasury Department and the IRS received three written comments 
on the proposed regulations. No requests for a public hearing were 
made, and no public hearing was held. After consideration of the 
comments, this Treasury decision adopts the proposed regulations 
without modification.

Summary of Comments

    The three comments submitted in response to the proposed 
regulations are available at www.regulations.gov or upon request.
    Two of the comments were supportive of the proposed regulations and 
did not provide any suggested revisions or additions. This summary of 
comments does not further address those comments.
    The other comment did not disagree with or suggest revision to any 
of the rules in the proposed regulations. The comment raised issues 
that the commenter believes the proposed regulations did not address. 
These include the potential impact of the new 5-year period on a 
partner's capital account under Sec.  1.704-1 (partner's distributive 
share) when a partnership directly owns the property, whether and how 
the partnership allocates the rehabilitation credit to partners, 
potential reporting obligations by a partnership on Schedule K-1 (Form 
1065), the treatment of the remaining ratable share when a partner 
sells a partnership interest within the 5-year credit period, and the 
interaction of Sec.  1.704-1 with Sec.  1.50-1 (lessee's income 
inclusion following election of lessor of investment credit property to 
treat lessee as acquirer).
    With respect to the potential impact of the new 5-year period on a 
partner's capital account under Sec.  1.704-1 when the partnership 
directly owns the QRB, the comment concluded that for partners ``there 
would be a capital account effect that would not take into account the 
5-year allocation of the credit.'' Partnership capital accounting rules 
are addressed in the regulations to section 704, and therefore are not 
included in these final regulations. However, for clarification, the 
Treasury Department and the IRS agree that there

[[Page 58267]]

would be a capital account adjustment that would not take into account 
the 5-year credit period. In other words, the full amount of the 
capital account adjustment under Sec.  1.704-1 is reflected in a 
partner's capital account in the year the rehabilitation credit is 
determined.
    With respect to whether and how the partnership allocates the 
rehabilitation credit to partners, the comment specifically asked 
``whether the partners are allocated 20 percent of the credit each year 
although all of the credit basis is reduced in the first year when the 
property is placed in service or whether, after the first year, the 
remaining four years over which the credit is spread is taken into 
account and applied solely at the partner level over those remaining 
years, consistent with the section 1.50-1 regulations.'' Partnership 
allocation rules of general business credits are specifically addressed 
in the regulations to section 704, and therefore are not included in 
these final regulations. However, for clarification, the rehabilitation 
credit is not allocated by the partnership, but is calculated at the 
partner level and claimed by the partner ratably over the 5-year credit 
period. As under section 47 prior to the TCJA, the partnership 
allocates qualified rehabilitation expenditures (QREs) to its partners. 
Under section 47(b), QREs with respect to any QRB are taken into 
account for the taxable year in which the QRB is placed in service.
    By way of further explanation, the calculation of the 
rehabilitation credit at the partner level is made as part of 
calculating the investment credit under section 46, which is listed as 
a current year general business credit under section 38. Section 1.704-
1(b)(4)(ii), which requires allocations with respect to the investment 
tax credit provided by section 38 to be made in accordance with the 
partners' interests in the partnership, provides that allocations of 
cost or qualified investment (as opposed to the investment credit 
itself, which is not determined at the partnership level) that are made 
in accordance with Sec.  1.46-3(f) shall be deemed to be made in 
accordance with the partners' interests in the partnership. For 
purposes of the investment credit, part of those allocations to 
partners would include QREs to calculate the rehabilitation credit. 
Partners then compute the investment credit at the partner level based 
on partner level limitations. See also TD 9872 (84 FR 34775) and TD 
9776 (81 FR 47701) (these Treasury decisions relate to Sec.  1.50-1 and 
both preambles contain relevant descriptions of how the rehabilitation 
credit is calculated in the context of passthrough entities, including 
that the calculation is done at the partner level in the case of 
partnerships and the S corporation shareholder level in the case of 
subchapter S corporations).
    Lastly, addressing issues related to potential reporting 
obligations by a partnership on Schedule K-1, the sale of a partnership 
interest within the 5-year credit period, and the interaction of Sec.  
1.704-1 with Sec.  1.50-1 (including amending Sec.  1.704-1 as 
recommended in the comment) is beyond the scope of the final 
regulations.

Applicability Date

    These final regulations apply to taxable years beginning on or 
after September 18, 2020. However, taxpayers may choose to apply these 
final regulations for QREs paid or incurred after December 31, 2017, in 
taxable years beginning before September 18, 2020, provided the 
taxpayers apply the final regulations in their entirety and in a 
consistent manner. See section 7805(b)(7).

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.
    In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 
6), it is hereby certified that these final regulations will not have a 
significant economic impact on a substantial number of small entities. 
Although the rules may affect small entities, data are not readily 
available about the number of taxpayers affected. The economic impact 
of these regulations is not likely to be significant, however, because 
these final regulations substantially incorporate statutory changes 
made to section 47 by the TCJA that have been effective for QREs paid 
or incurred after December 31, 2017. The final regulations will assist 
taxpayers in understanding the changes to section 47 and make it easier 
for taxpayers to comply with those changes and section 50, which was 
not changed by the TCJA.
    Pursuant to section 7805(f) of the Internal Revenue Code, these 
regulations were submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business. No comments were received from the Small Business 
Administration.

Drafting Information

    The principal author of these final regulations is Barbara J. 
Campbell, Office of the Associate Chief Counsel (Passthroughs and 
Special Industries), IRS. However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


0
Par. 2. Section 1.47-7 is added to read as follows:


Sec.  1.47-7   Rehabilitation credit allocated over a 5-year period.

    (a) In general. For purposes of section 46, for any taxable year 
during the 5-year period beginning in the taxable year in which a 
qualified rehabilitated building, as defined in section 47(c)(1) and 
Sec.  1.48-12(b), is placed in service, the rehabilitation credit for 
the taxable year is an amount equal to the ratable share for the 
taxable year, provided the requirements of section 47 are satisfied. 
Except as provided by section 13402(c)(2) of Public Law 115-97, 131 
Stat. 2054 (2017), this section applies with respect to qualified 
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.  
1.48-12(c), paid or incurred after December 31, 2017.
    (b) Ratable share. For purposes of paragraph (a) of this section, 
the term ratable share means, for any taxable year during the 5-year 
period described in such paragraph, the amount equal to 20 percent of 
the rehabilitation credit determined with respect to the qualified 
rehabilitated building, allocated ratably to each year during such 
period.
    (c) Rehabilitation credit determined. The term rehabilitation 
credit determined means the amount equal to 20 percent of the qualified 
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.  
1.48-12(c), taken into account under section 47(b)(1) for the taxable 
year in which the qualified rehabilitated building is placed in 
service. However, if the taxpayer claims the additional first year 
depreciation for the qualified rehabilitation expenditures pursuant to 
Sec.  1.168(k)-2(g)(9), the term rehabilitation credit determined means

[[Page 58268]]

the amount equal to 20 percent of the remaining rehabilitated basis, as 
defined in Sec.  1.168(k)-2(g)(9)(i)(B), of the qualified rehabilitated 
building for the taxable year in which such building is placed in 
service.
    (d) Coordination with section 50. For purposes of section 50 and 
Sec.  1.50-1, the amount of the rehabilitation credit determined is the 
amount defined in paragraph (c) of this section.
    (e) Examples. The provisions of paragraphs (a) through (d) of this 
section are illustrated by the following examples. Assume that the 
additional first year depreciation deduction provided by section 168(k) 
is not allowed or allowable for the qualified rehabilitation 
expenditures.
    (1) Example 1: Rehabilitation Credit Determined and Ratable Share. 
Between February 1, 2021 and October 1, 2021, X, a calendar year C 
corporation, incurred qualified rehabilitation expenditures of $200,000 
with respect to a qualified rehabilitated building. X placed the 
building in service on October 15, 2021. X's rehabilitation credit 
determined in 2021 under paragraph (c) of this section is $40,000 
($200,000 x 0.20). For purposes of section 46, for each taxable year 
during the 5-year period beginning in 2021, the ratable share allocated 
under paragraph (b) of this section for the year is $8,000 ($40,000 x 
0.20).
    (2) Example 2: Coordination with section 50(c). The facts are the 
same as in paragraph (e)(1) of this section (Example 1). For purposes 
of determining the amount of X's basis adjustment in 2021 under section 
50(c), the amount of the rehabilitation credit determined under 
paragraph (c) of this section is $40,000.
    (3) Example 3: Coordination with section 50(a). The facts are the 
same as in paragraph (e)(1) of this section (Example 1). In 2021 and 
2022, X claimed the full amount of the ratable share allowed under 
section 46, or $8,000 per taxable year. X's total allowable ratable 
share for 2023 through 2025 is $24,000 ($8,000 allowable per taxable 
year). On November 1, 2023, X disposes of the qualified rehabilitated 
building. Under section 50(a)(1)(B)(iii), because the period of time 
between when the qualified rehabilitated building was placed in service 
is more than two, but less than 3 full years, the applicable recapture 
percentage is 60%. Based on these facts, X has an increase in tax of 
$9,600 under section 50(a) ($16,000 of credit claimed in 2021 and 2022 
x 0.60) and has $3,200 of credits remaining in each of 2023 through 
2025, after forgoing $4,800 in credits in each of the years 2023 
through 2025 ($8,000 x 0.60).
    (4) Example 4: Coordination with section 50(d)(5) and Sec.  1.50-1; 
C corporation lessee. X, a calendar year C corporation, leases 
nonresidential real property from Y. The property is a qualified 
rehabilitated building that is placed in service on October 15, 2021. 
Under paragraph (c) of this section, the amount of the rehabilitation 
credit determined is $100,000. Y elects under Sec.  1.48-4 to treat X 
as having acquired the property. The shortest recovery period that 
could be available to the property under section 168 is 39 years. 
Because Y has elected to treat X as having acquired the property, Y 
does not reduce its basis in the property under section 50(c). Instead, 
pursuant to section 50(d)(5) and Sec.  1.50-1, X, the lessee of the 
property, must include ratably in gross income over 39 years an amount 
equal to the rehabilitation credit determined with respect to such 
property.
    (5) Example 5: Coordination with section 50(d)(5) and Sec.  1.50-1; 
partnership lessee. A and B, calendar year taxpayers, form a 
partnership, the AB partnership, that leases nonresidential real 
property from Y. The property is a qualified rehabilitated building 
that is placed in service on October 15, 2021. Under paragraph (c) of 
this section, the amount of the rehabilitation credit determined is 
$200,000. Y elects under Sec.  1.48-4 to treat the AB partnership as 
having acquired the property. The shortest recovery period that could 
be available to the property under section 168 is 39 years. Because Y 
has elected to treat the AB partnership as having acquired the 
property, Y does not reduce its basis in the building under section 
50(c). Instead, A and B, the ultimate credit claimants, as defined in 
Sec.  1.50-1(b)(3)(ii), must include the amount of the rehabilitation 
credit determined under paragraph (c) of this section with respect to A 
and B ratably in gross income over 39 years, the shortest recovery 
period available with respect to such property.
    (f) Applicability date.
    This section applies to taxable years beginning on or after 
September 18, 2020. Taxpayers may choose to apply this section for 
taxable years beginning before September 18, 2020, provided the 
taxpayer applies this section in its entirety and in a consistent 
manner.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.

    Approved: September 4, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-20671 Filed 9-16-20; 4:15 pm]
BILLING CODE 4830-01-P