September 5, 2017

How to Maximize Qualified Expenses to Save More with Historic Tax Credits

Applying for historic tax credits is a great way to finance a historic redevelopment project. Once you determine that your project is eligible for the Missouri Historic Tax Credit (HTC) Program, avoid common kickbacks to increase the amount of qualified expenses.

To avoid wasting time and money, it helps to be familiar with the HTC program guidelines. The Anders Real Estate and Construction Team has extensive experience with historic tax credits as well as the kickbacks and how to avoid them.

Inside versus outside work

The first kickback is inside vs. outside work. In order to be a qualified expense eligible for credits, the improvement must be made within the footprint of the building. This basically means that things such as room enlargements or garages that were not a part of the original structure of the home are not qualified expenditures. It’s important to understand this when having your preliminary plans approved by the state.

Items such as electrical and plumbing work must be allocated between inside and outside of the building, preferably on the invoice. This is another example of where working with a contractor experienced in HTC comes in handy.

For example, let’s say you need to replace the sewer line from the house to the main at the street. You will need to allocate the cost to replace this line between the portion of the line that ran under the house, or within the footprint, and the amount of line run outside of the foundation in the yard to the street. The portion outside of the foundation line is non-qualified. The same goes for electrical.

Expenses should match the proof-of-payment documentation

The second kickback to watch out for is that the expense should match the proof of payment documentation (POP). The total amount shown on the EXP form for the expense paid should match exactly to the amount paid per the bank statement or canceled check. The CPA and the state are going to match each POP to each line on the EXP form. If the expense amount does not match an amount on the POP document it is considered non-qualified.

For example, if you buy nonqualified and qualified things with one check, instead of backing out the nonqualified items and reporting a net amount on the spreadsheet, report the full amount of the payment and then back out the non-qualified items in the non-qualified column.

Non-qualified expense column

The last common kickback we wanted to share is making sure you report all non-qualified expenses in the non-qualified expense column. Read through the Missouri DED guidelines for a full list of non-qualified items. Some examples to look out for that are nonqualified include expenses such as:

  • Lightbulbs
  • Closet systems
  • Appliances
  • Fences
  • Mirrors
  • Blinds and shades
  • Tools
  • Driveways and walkways
  • Building enlargements
  • Insurance, other than builders risk

With that being said, some common qualified expenses that sometimes people miss are:

  • Loan interest on construction loans
  • Real estate taxes during the rehab period
  • Utilities paid during the construction period
  • Solar panels
  • Builders risk insurance

Minimizing non-qualified expenses will help you save even more on your historic project. The Anders Real Estate and Construction Group can help you navigate the ins and outs of historic preservation projects to maximize the tax credits on your historic renovation project. Contact an Anders advisor to discuss how to maximize your next historic renovation project.

All Insights

Keep up with Anders

Want to keep up with all the latest insights from Anders? Subscribe and receive the information that matters to you.