The Illinois Historic Preservation Tax Credit score Program is run by the Illinois State Historic Preservation Workplace within the Illinois Division of Pure Sources. This program supplies a state revenue tax credit score (the “IL-HTC”) equal to 25% of a undertaking’s certified rehabilitation expenditures — to not exceed $three million per undertaking — to house owners of licensed historic constructions who undertake licensed rehabilitations. The IL-HTC may be claimed to offset revenue tax imposed on people, companies, and trusts and estates.

Builders usually look to promote historic tax credit earned throughout the rehabilitation of a historic construction as a supply of financing for the undertaking. Nevertheless, the IL-HTC shouldn’t be freely transferable between unrelated events. 

Many state tax credit score packages that award non-transferable state tax credit permit a developer partnership to “disproportionately allocate” the credit to its companions. This enables buyers to buy a small possession curiosity (e.g., 1% or .01%) within the growth partnership, and in return, the investor might negotiate to obtain an allocation of as much as 100% of the state tax credit. 

Till lately, the IL-HTC statutes have been unclear as as to whether the IL-HTC may very well be disproportionately allotted to buyers in IL-HTC partnerships.

Particularly, 35 ILCS 31/10(d) supplies that: 

“[IL-HTCs] granted to a partnership, a restricted legal responsibility firm taxed as a partnership, or different a number of house owners of property shall be handed by means of to the companions, members, or house owners respectively on a professional rata foundation or pursuant to an executed settlement among the many companions, members, or house owners documenting any alternate distribution technique” (emphasis added). 

This language means that the IL-HTC may very well be disproportionately allotted to the house owners of a pass-through entity if the disproportionate allocation is agreed to within the pass-through entity’s working settlement.

Then again, till lately, 35 ILCS 5/228 supplied that: 

“If the taxpayer is a partnership or Subchapter S company, the [IL-HTC] shall be allowed to the companions or shareholders in accordance with the dedication of revenue and distributive share of revenue beneath Sections 702 and 704 and Subchapter S of the Inside Income Code” (emphasis added).

This language means that IL-HTCs awarded to a pass-through entity might solely be allotted to the house owners of the pass-through entity in keeping with their possession percentages. This may successfully forestall an investor who owns a small possession curiosity from receiving an allocation of IL-HTCs in extra of that small possession curiosity (i.e., the proprietor of a 1% possession curiosity might solely obtain an allocation of 1% of the IL-HTCs).

Thus, 35 ILCS 31/10(d) and 35 ILCS 5/228 appeared inconsistent as as to whether an investor in a pass-through entity might obtain a disproportionate allocation of IL-HTCs.

Efficient Might 6, 2022, the Illinois legislature sought to resolve this inconsistency in favor of flexibility, by revising 35 ILCS 5/228 to state the next, which is in line with the language in 35 ILCS 31/10(d):

“If the taxpayer is a partnership, Subchapter S company, or a restricted legal responsibility firm the [IL-HTC] shall be allowed to the companions, shareholders, or members in accordance with the dedication of revenue and distributive share of revenue beneath Sections 702 and 704 and Subchapter S of the Inside Income Code supplied that credit granted to a partnership, a restricted legal responsibility firm taxed as a partnership, or different a number of house owners of property shall be handed by means of to the companions, members, or house owners respectively on a professional rata foundation or pursuant to an executed settlement among the many companions, members, or house owners documenting any alternate distribution technique” (emphasis added).

Accordingly, the Illinois legislature has eliminated the inconsistencies between these statutes and clarified that IL-HTCs may be disproportionately allotted pursuant to the phrases of an settlement among the many companions, members, or house owners of a pass-through entity. This could present extra consolation to buyers seeking to obtain a disproportionate allocation of IL-HTCs from growth partnerships.