Nonprofit organizations can often have a difficult time securing funding to care for their buildings. These organizations may have a historic focus, such as a historic house museum, or may be using a historic building for their offices or to support their missions. For any type of building use, regular maintenance is vital. This can include basic daily repairs, but also larger maintenance tasks like painting and mortar repointing, which are repetitive and can be expensive. Due to cost, these and larger projects are often delayed to a point that can increase damage to the building, requiring capital fundraising that might detract from the daily mission of the nonprofit.
Historic tax credits can assist nonprofits in fundraising efforts, allowing each dollar to go further to support organizational missions as well as historic preservation.
How do tax-exempt entities take advantage of tax credits, when credits are used to lower the amount of taxes owed to the government?
The Texas Historic Preservation Tax Credit (THPTC) can be applied to either the Texas Franchise Tax or the Texas Insurance Premium Tax, which most THPTC applicants (even for-profit businesses) do not pay. Upon completion of an architectural project, the credit is designed to be sold to a tax-paying corporation, returning cash to the applicant. Nonprofit organizations can sell their credits directly to corporations they know or can utilize the services of a credit broker to connect them with new corporations.
The Federal Rehabilitation Tax Credit can also be used by nonprofits, as long as the building is used for income-producing purposes and there is a tax-paying partner involved in the project. Building owners who are interested in pursuing the federal credit for a nonprofit should contact a tax attorney to better understand these requirements.
To qualify for the THPTC, nonprofit applicants must meet the same requirements as for-profit applicants and follow the same application process.
- Nonprofits include 501(c)(3) and other tax-exempt 501(c) organizations as defined by the IRS code. This includes history-based organizations, community centers, religious organizations, social clubs, chambers of commerce, private schools and colleges, etc.
- Applicants must own the building or lease it under a long-term lease of at least 39 years.
- Buildings must have a state or federal historic designation or must be determined eligible for one. This includes listing in the National Register of Historic Places or designation as a Recorded Texas Historic Landmark or State Antiquities Landmark. Buildings that are not designated must complete the designation process before a completed construction project can be certified.
- Applicants must spend at least $5,000 on architectural work. Typically, an applicant will earn more money when they have more credits to sell, but the THC cannot offer financial advice.
- Architectural work must meet the Secretary of the Interior’s Standards for Rehabilitation, along with other guidance produced by the THC and the National Park Service, to protect the physical integrity and character of the historic building.
- The Part A and Part B applications should be submitted before construction work begins. This is not required by the program rules but can help lead a project to success. (The Part A application must be submitted before all rehabilitation work is complete.) The tax credits can be denied if completed work does not meet the Standards for Rehabilitation, so early communication and early submittal of applications is always encouraged.
Credits provided for the THPTC are equal to 25 percent of qualified rehabilitation expenses (QREs) per project.
Not all project costs are QREs. Generally, QREs are those costs associated directly with operation and maintenance of the historic building. This includes structural work; repairs to historic features and finishes; new mechanical, electrical, and plumbing systems; the addition of stairs or elevators for egress; new finishes that are attached to the building; etc. Soft costs, including payment to architects, engineers, and other project professionals, are also QREs. Building additions, furniture, appliances, site work, signage, and other work that does not directly impact the building are not QREs and do not count toward the value of the credit.
Many nonprofit projects can also be funded, largely or in part, through public or private grants, including the Texas Preservation Trust Fund administered by the THC. Applicants should be aware that financial rules for the Texas tax credit refer directly to IRS regulations, which place limitations on whether grant-funded work can count as QREs and toward the value of the credit. Project costs not covered by grant funding can still be counted as QREs. The THC does not make financial decisions about either the federal or state program and cannot provide further guidance on this issue. All applicants considering the use of grants and historic tax credits should consult with an accountant or attorney for further guidance on how varying funding sources can be used together.
Nonprofit organizations interested in learning more about the historic tax credit programs are encouraged to contact our tax credit staff.