FISCAL NOTE
Date Requested: March 26, 2025
Time Requested: 02:20 PM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 3928 |
Introduced |
HB3486 |
|
|---|
| CBD Subject: |
Real and Personal Property |
|---|
|
FUND(S):
General Revenue Fund
Sources of Revenue:
General Fund
Legislation creates:
Increases Existing Expenses
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The stated purpose of this bill is to provide a credit for qualified rehabilitated buildings investment under the corporation net income tax.
According to our interpretation, the bill if passed, would allow all tax credits “allocated” through a tax credit certificate issued pursuant to W.Va. Code §11-24-23a(c) to be available for the year the qualified rehabilitated building is “placed-in-service” as defined in §1.179-4(e), Title 26 of the United States Code. The change is retroactive to July 1, 2023. Though it is unclear from the bill’s language, it is assumed that the change would also apply to the Qualified Rehabilitated Buildings Investment credit program as outlined under W.Va. Code §11-21-8a.
The term “placed-in-service” is defined under 26 CFR §1.179-4 as the time that property is first placed by the taxpayer in a condition or state of readiness and availability for a specifically assigned function, whether for use in a trade or business, for the production of income, in a tax-exempt activity, or in a personal activity. In most cases, the “placed-in-service” date does not equate with the project being completed. In some cases, major work is still in progress and several months can pass before the project is fully completed.
Although federal qualification standards are used by the State, the rest of the procedures for managing the State credit program are very different from those of the federal program. Federal law outlines numerous “recapture” provisions, including a “no flip” rule, which West Virginia does not have. These recapture provisions offer significant protection to the federal government. The only recapture provision under the West Virginia credit program relates solely to phased rehabilitations.
During the 2017 Second Extraordinary Session, Enrolled HB 203 increased the tax credit percentage for Qualified Rehabilitated Buildings from 10 percent to 25 percent of qualified expenditures. During the 2022 Regular Session, Enrolled HB 4568 removed the credit caps and allowed for phased rehabilitation projects. These changes have caused the tax credits generated by the credit program to increase from just $2.5 million dollars in FY2022 to at least $24 million in FY2024. Increasingly, these projects are organized under Limited Liability Companies, sometimes by credit intermediaries located in other states. In some cases, these companies close after the tax credits are sold or otherwise disbursed. By adopting some federal procedures favorable to the taxpayer without adopting the federal safeguards, General Revenue is put in a vulnerable position because the State’s safeguards will have been stripped away.
Per our interpretation, the potential impact to General Revenue Fund collections would for the most part relate to timing with the impact being revenue neutral over the short term. Longer term, there could be losses related to credit which was sold/assigned/transferred and/or claimed, and the project is then not fully completed and functional.
Additional administrative costs incurred by the State Tax Department would be $1,100 in FY2025 and $44,000 in subsequent fiscal years.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2025
Increase/Decrease
(use"-") |
2026
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
1,100 |
44,000 |
44,000 |
| Personal Services |
0 |
44,000 |
44,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
1,100 |
0 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
According to our interpretation, the bill if passed, would allow all tax credits “allocated” through a tax credit certificate issued pursuant to W.Va. Code §11-24-23a(c) to be available for the year the qualified rehabilitated building is “placed-in-service” as defined in §1.179-4(e), Title 26 of the United States Code. The change is retroactive to July 1, 2023. Though it is unclear from the bill’s language, it is assumed that the change would also apply to the Qualified Rehabilitated Buildings Investment credit program as outlined under W.Va. Code §11-21-8a.
The term “placed-in-service” is defined under 26 CFR §1.179-4 as the time that property is first placed by the taxpayer in a condition or state of readiness and availability for a specifically assigned function, whether for use in a trade or business, for the production of income, in a tax-exempt activity, or in a personal activity. In most cases, the “placed-in-service” date does not equate with the project being completed. In some cases, major work is still in progress and several months can pass before the project is fully completed.
Although federal qualification standards are used by the State, the rest of the procedures for managing the State credit program are very different from those of the federal program. Federal law outlines numerous “recapture” provisions, including a “no flip” rule, which West Virginia does not have. These recapture provisions offer significant protection to the federal government. The only recapture provision under the West Virginia credit program relates solely to phased rehabilitations.
During the 2017 Second Extraordinary Session, Enrolled HB 203 increased the tax credit percentage for Qualified Rehabilitated Buildings from 10 percent to 25 percent of qualified expenditures. During the 2022 Regular Session, Enrolled HB 4568 removed the credit caps and allowed for phased rehabilitation projects. These changes have caused the tax credits generated by the credit program to increase from just $2.5 million dollars in FY2022 to at least $24 million in FY2024. Increasingly, these projects are organized under Limited Liability Companies, sometimes by credit intermediaries located in other states. In some cases, these companies close after the tax credits are sold or otherwise disbursed. By adopting some federal procedures favorable to the taxpayer without adopting the federal safeguards, General Revenue is put in a vulnerable position because the State’s safeguards will have been stripped away.
Per our interpretation, the potential impact to General Revenue Fund collections would for the most part relate to timing with the impact being revenue neutral over the short term. Longer term, there could be losses related to credit which was sold/assigned/transferred and/or claimed, and the project is then not fully completed and functional.
Additional administrative costs incurred by the State Tax Department would be $1,100 in FY2025 and $44,000 in subsequent fiscal years.
Memorandum
The stated purpose of this bill is to provide a credit for qualified rehabilitated buildings investment under the corporation net income tax.
The title of this bill has a typographical error and is not grammatically correct. Further, the title does not address the purpose of the bill, which is to retroactively change the date the credit can be claimed to the date the property was placed into service. The Note also fails to indicate the actual purpose of the bill.
Subsection (b) addresses phased rehabilitations. The last sentence is amended to read as follows:
Tax credits claimed by a taxpayer, including, but not limited to, the applicant or a third-party transferee of the tax credit, as applicable, associated with a completed phase of a phased rehabilitation are subject to recapture by the Tax Commissioner if an applicant for tax credits fails to submit an approved historic preservation certification application, Part 3 – Request for Certification of Completed Work, for the rehabilitation within 60 months of the date of the advisory determination by the National Park Service that such the phase has been completed in accordance with the Secretary of the Interior standards for rehabilitation.
The significance of this change is not apparent.
Subsection (c) is amended so that a sentence is added that reads as follows:
Notwithstanding, as of July 1, 2023, all tax credits allocated through a tax credit certificate issued pursuant to this section shall be available for the year the qualified rehabilitated building is “placed-in-service” as defined in §1.179-4(e), Title 26 of the United States Code.
This bill provides for a retroactive application back to July 1, 2023. The new language uses the word “shall,” meaning all credits must be available and used as of the date placed into service going back to July 1, 2023. Some taxpayers may suffer expiration of credits prematurely with the retroactive application pursuant to §11-24-23e, which limits carry forward to ten years after entitlement.
The new language is confusing. The phrase “allocated through a tax credit certificate” is unclear. It seems to imply that the bill only applies to pass-through entities. It is also unclear whether the issuance of a tax certificate must happen before the credit can be claimed. This would mirror current law. However, it could also mean that the issuance of a tax certificate must occur before the credit can be claimed, but the credit can be claimed back to the placed-in-service date through the filing of amended returns.
Person submitting Fiscal Note: Mark Muchow
Email Address: RADfiscal@wv.gov