Question

Emily spent $135,000 to rehabilitate a certified historic building (adjusted basis of $90,000) that originally had been placed in service in 1935. Compute Emily’s credit for rehabilitation expenditures.

 

 

Answer 1

Computation of Tax Credit

A tax credit is defined as a tax incentive which permits certain group of taxpayer to deduct the amount of credit from the total taxable amount. Generally, tax credits are categorized as refundable and non-refundable tax credits. Majority of tax credits are non-refundable which means these can only be applied to the point at which no more taxes are owed. On the other hand, refundable tax credit refers to the credit exceeds the amount of tax owed under which the excess is refunded back to the tax payer.

 

In context of tax credit for rehabilitation expenditure, generally for non-residential buildings which was originally placed in service before 1936, a 10 % of credit is available for rehabilitation expenditures. On the other hand, in case of residential property, the tax credit is 20%. Here, the building has been significantly rehabilitated, thus E is entitled to the credit. The amount of credit allowable to E is computed as:

 

E’s credit allowable = 10% × $135,000

                                   = 13,500

 

Therefore, the credit allowable to E comes out to be $13,500.

 

In case if the building was a historic structure that is originally built before 1936, the credit allowed would be calculated as:

 

Credit allowed = 20% × $135,000

                           = $27,000

 

Therefore, the credit allowed to E if the building was a historic structure comes out to be $27,000.

Therefore, the credit allowed to E if the building was a historic structure comes out to be $27,000.