Tax credits are available from numerous sources and can generally be categorized in two types: Equity and Certificate. Please allow RSA to identify the tax credits available to you.
Equity
Credits are transferred from the entity generating the credit to the ultimate user through the use of a limited partnership. The best examples of equity credits are the Section 42 Federal Affordable Housing credits & Section 47 Federal Historic tax credits.
The characteristics of equity tax credits include, but not limited to:
The tax credit holder is a member of a limited partnership structure.
Typically there is a long term commitment with tax credits & passive losses flowing to the limited partners.
Tax credits & passive losses are conveyed through a K1 from the general partner.
For tax purposes, the credits are considered a reduction of tax liability.
The tax credit position is generally non-transferable or sold.
There is the possibility of recapturing tax credits in the event that the conditions created for credit are not met.
Certificate
These credits are evidenced by a certificate or transfer agreement issued by a State.
The characteristics of certificate tax credits include, but not limited to:
Tax credits are usually a 1 year credit, with a carry forward provision in place.
There is no limited partnership necessary.
They are generally transferable therefore can be passed on to another tax payer.
Recapture in this instance, refers to the ability of a State to rescind the credit. Recapture provisions vary among States however the trend is to have no recapture.
This type of credit is considered a payment of tax not a 'reduction' of tax.
The credits are created through State tax legislation that explain the qualifications & restrictions associated with the credit.
