11 Tips to Maximize Value of Missouri Historic Tax Credits
With the recent cuts to the Missouri Historic Tax Credit program from $140 million to $90 million annually, it is more important than ever to make the most of these credits for redeveloping commercial and residential historic property. Once you determine that your project is eligible for the Missouri Historic Tax Credit Program, check out these tips to maximize the savings.
How to make the most of Missouri Historic Tax Credits
1) Project record keeping
Whether you choose to organize your records electronically or in a shoe box, keeping track of all of the documentation relating to your historic project is vital. Extensive record keeping minimizes the chances of missing out on credits due to missing or incomplete documentation.
2) Project expense tracking
To go along with project record keeping, expense tracking is the next step. Keeping your receipts and bank statements in order is important, but summarizing these expenses in the proper format will save a lot of time and money. Program guidelines require project expenses to be in an Excel file called an EXP-Form. This Excel file must be properly formatted with the correct columns and rows and be in an order that is easily reviewed.
Meeting with your CPA before your project begins to obtain a copy of the EXP-Form in its correct format allows you to update the spreadsheet as your project progresses. Delivering a complete and accurate EXP-Form to your CPA will save a lot of money on billed hourly time in professional fees. If you deliver the EXP-Form in electronic format that follows the order of what’s in your file box, the reviewer can easily do some minor cleanup and review the project efficiently.
3) Not all invoices are created equal
Detail is extremely important on project invoices. Your CPA will need this detail for an audit, the DED will need this detail in a compilation or audit, and it’s particularly important for your historic project. Detail helps when allocating costs that are inside and outside of the footprint of the historic structure, for example:
- The connections between the street and the house are technically outside of the footprint, and are therefore non-qualified
- However, the connections inside of the footprint are qualified
- If the plumber is knocking it all out at once, request detail for each part of the project so your CPA (or the DED) can make a clear distinction on the audit
- The more detailed the cost certification is, the less likely you are to get DED review questions
All contractors must be properly registered to do business in the state. The state can disallow expenses if a contractor is not up to date on their state filings or registered to do business. We can assure you the state will vet each contractor and if they are not registered it’s your responsibility to go back to the contractor and have them update their state information. This is a nightmare because it creates a lot of work on the contractors end and they likely will not do it. Be sure to verify with your contractors BEFORE you begin work that they are properly registered.
4) Know your beginning and ending dates
Plan around your project beginning and ending dates. Apply as early as possible, and make sure no hard costs, including demo, are done prior to application date. Set a project completion date and stop all hard costs on this date, if possible. Soft costs are allowable before and after application and completion dates.
We have seen too many developers get in a hurry to start renovating their homes or rental properties. However, some big costs can come at the outset of the project, and the DED is hard and fast on disallowing those expenses for historic tax credits.
5) Cash is not king
Cash payments will be disallowed. This rule is explicitly stated multiple times in the final guidelines. Our professionals have extensive experience with historic tax credit projects and we can fight for you on a lot of issues with the state, but if you pay for something in cash there is nothing we can do.
Why are cash payments disallowed? If you think about the whole process and why you have to save invoices and produce bank statements and check copies you’ll notice that the DED needs to have a trail that they can review. If you pay for something in cash, it does not show up on a bank statement other than saying ATM or bank withdrawal, and there is no proof that you actually paid who you said you paid. Since the DED cannot verify this payment with a supporting document, they will throw it out.
6) Accrued expenses
Accrued expenses are expenses that have been incurred or will be incurred but not yet paid. An example of an accrued expense is the CPA fee you pay. You will most likely not pay the CPA until their work is complete, so their fee must be accrued on the spreadsheet so that you can receive credits for the expense although it has not been paid yet.
The developer fee can also be accrued but only up to 90% of it. One thing to keep in mind is that soft costs, such as CPA fees, cannot be accrued unless there is a contractual document in place. Accrued expenses must be paid within 6 months of final completion for soft costs and within 6 years for developer fees. Accrued expenses must be clearly noted on the EXP-Form.
7) Look past the obvious expenses
Some eligible expenses in an HTC project are often overlooked. As long as detail is provided to DED, the expenses below can be eligible:
- Construction Utilities
- Construction Loan Interest
- Real Estate Taxes
- Solar Costs
8) Additional credit programs
Don’t forget about the Federal Historic Tax Credit program, which offers a 20% credit for redeveloping historic property built before 1936. Tax reform did change this credit by requiring it to be taken over five years, instead of when the project was placed in service. There are also other restrictions on the federal credit that may limit its applicability to state historic projects, but it is still well worth the time to investigate this potential, valuable program.
9) Don’t forget Neighborhood Preservation Act credits
Some historic renovation projects may also qualify for the Missouri Neighborhood Preservation Act (NPA) tax credit program. This program has various credit categories which offer either a 25% or 35% credit for qualifying rehabilitation projects. The NPA program also applies to some new construction projects, which would be eligible for a 15% credit for qualifying costs. It is important to note that new NPA projects would not qualify for the historic tax credit program. This is another valuable tax credit program that is worth investigating to determine if your historic renovation project is eligible.
10) Run the break-even analysis
Is the juice worth the squeeze? Perform a break-even analysis to determine the level of cost to make the credit process worth it.
11) First time advice
If it’s your first time, or even if you are a seasoned developer, a professional consultant can be worth their weight in gold. The guidance and expertise they provide can pay for itself in the additional credits earned. Talk to your project CPA early and often to make sure you are taking advantage of their expertise. Also keep in mind that a little upfront consulting can save a ton of money on the backend on cleanup and data entry fees.