The Certified Rehabilitation tax credit is a
refundable and transferrable credit that may be applied against income taxes imposed by KRS 141.020 (individual income tax) or KRS 141.040 (corporation income tax) and the limited liability entity tax (LLET) imposed by KRS 141.0401 with the ordering of credits as provided in KRS 141.0205. This credit is for completing a certified rehabilitation to a certified historic structure which is located within the jurisdiction of a consolidated local government or urban-county government and within one-half mile of a tax increment financing that has received at least preliminary approval. Any unused credit may be carried forward 7 years.
The overall cap for the certified rehabilitation tax credit is increased to $100 million for applications received on or after April 30, 2022. Twenty-five percent of the cap is allocated to owner-occupied residential property. The previous cap was $5 million.
Effective for taxable years beginning on or after December 31, 2005
- The total amount of credit allowed within any budgeted fiscal year is three million dollars ($3,000,000) prior to April 30, 2010 and five million dollars ($5,000,000) on or after April 30, 2010.
- Prior to April 30, 2010 a taxpayer could choose to use the credit or transfer the credit to an entity subject to the tax imposed by KRS 136.505. On or after April 30, 2010 a taxpayer must make an irrevocable election to use the refundable credit, or transfer the credit.
Note: For tax years beginning on or after January 1, 2021, bank franchise tax was repealed. Financial institutions are now subject to the corporation income tax and limited liability entity tax (LLET). With the repeal of bank franchise tax and without any change to KRS 171.397 to allow for the transfer of the credit to any entity except one subject to the bank franchise tax, this effectively ends the ability to transfer the tax credit for taxable years beginning on or after January 1, 2021. Any financial institutions holding transferred credits may use those credits to offset against their corporate income tax or LLET liability going forward.
Effective for taxable years beginning on or after January 1, 2014
- The amount of qualified rehabilitation expenses exceeds fifteen million dollars ($15,000,000).
- Substantial rehabilitation of the certified historic structure begins prior to July 1, 2015.
- The total approved credit is available over a four-year period.
- Credit amount: is limited to the first $30 million of qualified rehabilitation expenses, is equal to:
The maximum credit that may be claimed in a taxable year is 25 percent of the total approved credit.
- 30 percent of the qualified rehabilitation expenses in the case of owner-occupied residential property; and
- 20 percent of the qualified rehabilitation expenses in the case of all other property.
Major Certified Rehabilitation Tax Credit
Prior to June 30, 2022, the Kentucky Heritage Council is authorized to award one major certified rehabilitation for a certified historic structure that meets specific requirements. The award allows a refundable and transferable tax credit against income tax and LLET. The rehabilitation project must begin before December 31, 2021 and be worth at least $50 million. The credit is allowed for 20% of the first $30 million of qualified expenses. The project is exempt from the individual project cap that applies to other projects eligible for the certified rehabilitation credit, but the award is subject to the overall credit cap (which has been raised—see below). The total approved credit is available over a four-year period, with the annual maximum credit limited to 25% of the total approved amount.
The application process begins with the Kentucky Heritage Council (KHC). The KHC determines what properties qualify for the credit, the guidelines for each property and if the credit will be used for the rehabilitation of a residence or commercial property located in a historic district. Applications must be submitted to the KHC by the 30th day after the close of a calendar year, January 30. After certification of the credit is received, a copy of the letter must be filed with the income tax return to determine the credit against the income tax liability and the LLET.
Who Can Claim the Credit?
The credit is passed through to the partners, members, or shareholders of a pass through entity that are the partners, members, or shareholders at the time of the application and subsequent approval of the credit. The income is reported on the Kentucky Schedule K-1 and any credit that is passed through to the members, partners, or shareholders may be used against individual income tax or corporate income tax and LLET.
A sole proprietor reporting business income on Schedule C (federal Form 1040) may claim the credit. An individual may also claim the credit if it is passed through to them from a partnership, LLC, or S-Corporation on a Kentucky Schedule K-1.
An individual may also claim the credit on their individual income tax return. A husband and wife filing separate returns or filing separately on a joint return, the credit may be taken by either or divided equally. If the application lists only one of the spouse's names, the listed spouse is entitled to claim the full credit.
A corporation may apply the certified rehabilitation tax credit against income tax and LLET on its Kentucky Corporation Income Tax and LLET Return. A corporation may also claim the credit if it is passed through to them from a pass-through entity on a Kentucky Schedule K-1.