If a company earns a Texas historic-structure rehabilitation tax credit and sells it to another company that later claims it, does the buyer need to make an extension payment, and when does the credit expire?

Plain-English summary

Note: this ruling's Chapter 171 citations for the historic-structure credit were later relocated to Chapter 172 by a 2023 law — see the alert above.

A Texas company owned a historic building undergoing certified rehabilitation and applied for a Certified Historic Structure Tax Credit, planning to sell the credit (once established) to another company (the "end user") that would claim it on its own franchise tax report. The Comptroller answered four related questions about extension payments, timing of sale, and the carryforward clock:

1. Extension payment when a credit covers the tax due: normally, a timely filing extension requires paying either 100% of last year's tax or 90% of the current year's tax, or penalty and interest apply. But if a taxable entity's available tax credit equals or exceeds the tax due, there's no tax liability to be penalized on — so a timely extension request is valid even without any payment (90% of zero is zero). If the credit doesn't fully cover the liability and the remainder is paid late, though, the extension fails and penalty/interest apply as usual.
2. No deadline to sell the credit: the company establishing the credit in 2017 could hold it and sell it to an end user as late as 2019 (or later) — there's no requirement to sell, transfer, or use the credit in the year it's established.
3. Buyer can claim it whenever they first use it: an end user who buys the credit in 2019 can claim it for the first time on its 2019 franchise tax report, even though the underlying historic structure was placed in service back in 2017.
4. Carryforward clock starts at eligibility, not first use: the five-report-year carryforward period begins running from the first report year the credit is ELIGIBLE to be claimed (here, the 2018 report, since the structure was placed in service in 2017) — not from whichever later year someone actually first claims it. So a credit first eligible in 2018 expires after the 2023 report regardless of when it's actually used or sold.

What this means for you

Owners of historic properties earning rehabilitation tax credits

You aren't required to use or sell your credit right away — you can hold it for years before selling. But the carryforward clock is running the whole time from the first year of eligibility, not from when you decide to sell or use it, so don't assume a sale resets the expiration timeline.

Buyers of historic-structure tax credits

Confirm exactly when the underlying structure was placed in service, since that (not your purchase date) determines when the carryforward clock started and when the credit expires — a credit purchased in year 3 of its 6-year eligible-use window only has 3 years of life left, not a fresh 6.

Accountants and tax professionals

Watch the 2023 statutory relocation flagged above: SB 1013 moved this credit from Chapter 171 to Chapter 172 and broadened a related federal tax-exempt-entity exception, effective 9/1/2023 — confirm current section numbers before citing this ruling's analysis to a client, even though the underlying extension-payment and carryforward mechanics described here should still apply conceptually.

Common questions

Q: If a tax credit fully covers a company's franchise tax liability, does it still need to make an extension payment to avoid penalties?
A: No — per this ruling, if the credit equals or exceeds the tax due, there's no tax liability to penalize, so a timely extension request needs no payment.

Q: Is there a deadline for selling a certified historic structure tax credit after it's established?
A: No — the ruling confirms there's no requirement to sell, transfer, or assign the credit in the year it's established; it can be sold years later, within the credit's overall carryforward window.

Q: Does buying a credit start a new carryforward period for the buyer?
A: No — the five-report-year carryforward clock runs from the first report year the credit was eligible to be claimed (tied to when the underlying structure was placed in service), regardless of when it's bought, sold, or first used.

Q: Do this ruling's statute citations still match current law?
A: Not exactly — a 2023 law (SB 1013) relocated the certified historic structure credit from Chapter 171 to Chapter 172, effective 9/1/2023, after this ruling issued.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.202 (Annual Report — extension payment requirements)
• Tex. Tax Code § 171.362 (Penalty for Failure to Pay Tax or File Report)
• Tex. Tax Code § 171.908 (Sale or Assignment of Credit)
• Tex. Tax Code § 171.906 (Carryforward)
• 34 Tex. Admin. Code Rule 3.598(f)(1), (g)(1) (Margin: Tax Credit for Certified Rehabilitation of Certified Historic Structures)

Superseding legislation (flagged in the STAR document itself):

• SB 1013, 88th Texas Legislature (2023), effective 09/01/2023 — moved the certified historic structure tax credit from Chapter 171 to Chapter 172 and expanded the IRC § 47(c)(2) exception to all IRC § 501(a) tax-exempt entities

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/201804014L

Original ruling text

ALERT: SB 1013 (88th Leg. Session 2023) moves the section relating to certified historic structures from Chapter 171 to Chapter 172. It also expands the exception to the depreciation and tax-exempt use provisions of Section 47(c)(2), Internal Revenue Code, to all entities exempted from federal income tax under Section 501(a), Internal Revenue Code. Effective 09/01/2023.

April 5, 2018

RE: Private Letter Ruling No. 20170601214430

**, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: 1] We are responding to your request dated November 16, 2016. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance regarding the use of tax credits for the certified rehabilitation of certified historic structures placed in service in 2017.

Facts Presented

** (Taxpayer) is a Texas entity and the owner of the historic COMPANY in CITY, Texas. The COMPANY is currently undergoing a historic rehabilitation. Taxpayer submitted a Certified Historic Structure Tax Credit application for the rehabilitation of the COMPANY.

At the time Taxpayer submitted this private letter ruling request, the projected completion date for the rehabilitation project was in the first quarter of 2017. After it establishes the tax credits for the certified rehabilitation of the COMPANY with the Comptroller, Taxpayer anticipates it will sell the credits to a taxable entity that will claim the credits on a franchise tax report (the end user).

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by the rulings and analysis.

Question One: Assume Taxpayer establishes the tax credits for the certified rehabilitation of the COMPANY with the Comptroller in 2017, and then sells the tax credits to an end user in June 2018. Can the end user request an extension of the filing date of its 2018 franchise tax return (based on its 2017 accounting year) without payment? In other words, will the Comptroller treat the tax credits, which were established in 2017, as taxes paid as of the May due date of the end user’s 2018 report, so that no late payment penalty will be assessed against the end user?

Ruling One: The Comptroller will assess penalty and interest on tax that is due and not paid by the original report due date, unless the taxable entity timely requests an extension and pays either 100 percent of the tax reported as due for the previous year or 90 percent of the taxes due for the current year.

Analysis: A timely request for extension of a 2018 report, due by May 15, 2018, must include a payment of either 100 percent of the previous year’s tax due or 90 percent of the current year’s tax due. Section 171.202 (Annual Report). Otherwise, penalty and interest apply. Section 171.362 (Penalty for Failure to Pay Tax or File Report).

If a taxable entity claims a tax credit on its franchise tax report, and that tax credit equals the amount of tax due, the taxable entity does not owe any franchise tax. There is no tax liability on which the Comptroller could assess penalty and interest. In addition, the entity’s timely request for an extension would be valid, even if the entity did not include a payment with the request for extension, because 90 percent of zero tax due is zero.

However, if the taxable entity’s tax liability exceeds the available credit, and the remaining tax is paid after the original due date of the report, the taxable entity will not be granted an extension of the original due date, penalty will apply, and interest will accrue from the 61st day after the due date until the liability is paid. See Section 171.362.

Please note that the purchase date of the credit is not relevant as long as the credit is allowed for the report period and is claimed by the final due date of the report.

Question Two: Assume Taxpayer establishes tax credits for the certified rehabilitation of the COMPANY with the Comptroller in 2017. May Taxpayer wait and sell the tax credits to an end user in April 2019?

Ruling Two: Yes. There is no requirement for Taxpayer to sell tax credits derived from the certified rehabilitation of a certified historic structure in the year the credits are established.

Analysis: Taxpayer may sell, transfer, or assign all or part of a credit derived from the certified rehabilitation of a certified historic structure, without limitation. See Section 171.908 (Sale or Assignment of Credit). The first report on which the credit may be claimed is the report based on the accounting period during which the rehabilitated structure is placed in service. See Rule 3.598(f)(1)(Margin: Tax Credit for Certified Rehabilitation of Certified Historic Structures). Unused credit can be carried forward for up to five consecutive report years, and the credit may be first claimed in any of those six report years. However, the total credit available must be claimed within those six report years. Any amount not claimed in those years will be lost. See Section 171.906 (Carryforward).

Question Three: If the answer to Question Two is yes, may the end user claim the tax credits for the first time on its 2019 franchise tax report?

Ruling Three: Yes. An end user who purchases certified rehabilitation tax credits in 2019 can claim the credits for the first time on its 2019 franchise tax report, even if the tax credits were derived from the certified rehabilitation of a certified historic structure placed back into service in 2017.

Analysis: See Analysis of Question Two.

Question Four: If the rulings for Questions Two and Three are that the credits from the rehabilitation of a project placed in service in 2017 may be held and sold to someone who first uses the credits on the May 2019 report, will the carryforward statute of limitations begin on the first year the credit is eligible to be claimed (2018 report) or the first year the credit is claimed (2019 report)?

Ruling Four: The statute of limitations on claiming the tax credit carryforward begins the first year the credit is eligible to be claimed. Tax credits derived from the rehabilitation of a certified historic structure placed back into service in 2017 can first be used on the 2018 report and expire after the 2023 report, assuming Taxpayer is a calendar-year filer.

Analysis: A tax credit for the certified rehabilitation of certified historic structures may be carried forward for five consecutive report years following the report year in which the credit is eligible to be claimed.

Rule 3.598(g)(1) states, “…the entity may carry the unused credit forward and apply the credit to the tax imposed by this chapter in any of the succeeding five report years following the first report year after the certified historic structure is placed in service.”

If Taxpayer establishes the tax credits for the certified rehabilitation of the COMPANY with the Comptroller in 2017, Taxpayer or an end user (calendar-year filer) could first use the credit on its 2018 franchise tax report. Taxpayer or end user could carry forward any credit that is not used on the 2018 report to reports in 2019, 2020, 2021, 2022, and 2023. The credit expires after the 2023 report. See Sections 171.906 and 171.908.

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20170601214430.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.