Last week, the South Carolina Department of Revenue issued what’s widely viewed as a taxpayer-friendly ruling that updates its guidance on the state’s popular textile tax credit program. The ruling offers clarity for developers and other real estate practitioners on the rules governing textile credits, which have been amended four times since the department’s most recent ruling on the subject in 2015.

The Department of Revenue’s ruling gives developers a clearer playbook on the South Carolina Textile Communities Revitalization Act, which provides a credit for the renovation, rehabilitation, and redevelopment of abandoned textile mill sites across the state. In short, taxpayers are allowed to earn a tax credit on 25% of their eligible rehabilitation expenses incurred in rehabilitating a textile mill site. 

Developers will have greater flexibility now when looking at prospective projects given the clear guidelines from the Department of Revenue. Developers, however, will need to be aware of a few key provisions that may affect the feasibility of a project. One major update was that the department reversed its position that if a textile mill building no longer exists on the property, then it can no longer be considered a textile site eligible for the tax credits.

Here's a look at the Department of Revenue’s ruling and what developers and other industry professionals should know about the textile credits program. 

SCDOR Clarifies Several Key Issues Related to the 1,000-Foot Rule

In 2018, the South Carolina General Assembly amended the Textile Communities Revitalization Act by expanding eligibility to certain buildings located within 1,000 feet of "any textile mill structure or ancillary uses" provided such buildings were also located in a distressed area as designated by the applicable council of government. The general assembly also provided a 200% square footage limitation with respect to certain buildings located on "contiguous" parcels that qualify under the 1,000-foot rule. Last week’s ruling clarifies that for properties designated as distressed, the rehabilitation of any building within the 1,000-foot rule can qualify for textile credits — not just buildings with an historical textile manufacturing or ancillary use. For example, the rehabilitation of a bowling alley located within 1,000 feet of a textile mill structure and on a parcel designated as distressed can qualify for textile credits even though the building containing the bowling alley was never put to a textile manufacturing or an ancillary use. 

Last week’s ruling also clarifies that for a building located on a contiguous parcel within the 1,000-foot rule, the 200% square footage limitation permits a taxpayer to triple the square footage of the existing building (not just double) and still claim textile tax credits on all of the taxpayer’s rehabilitation expenses. In the example given in the ruling, a 10,000-square-foot building can be rehabilitated into a building or buildings totaling 30,000 square feet without running afoul of the 200% limitation. 

However, the ruling also clarifies that the 200% limitation is based on the square footage of the buildings that existed on the contiguous parcel at the time the textile mill was abandoned. Moreover, the existing square footage includes buildings located on the contiguous parcel even if those buildings are beyond the 1,000-foot rule. The department provided an example in the ruling of a contiguous site that, at the time of abandonment, included a 10,000-square-foot building used to bottle beverages (which was within the 1,000-foot rule) and a 20,000-square-foot building used to recycle aluminum (which was beyond the 1,000-foot rule). The department confirmed that the taxpayer could earn textile credits on all of its rehabilitation expenses associated with rehabilitating the bottling building or constructing new buildings provided the total resulting square footage was 90,000 square feet or less.

What Else Developers Should be Aware of on Textile Tax Credits

Last week’s ruling also provides additional nuances that developers and taxpayers should be aware of. For example, while the ruling confirms that textile mill sites can be freely subdivided into sub parcels that retain the status of textile mill sites, the ruling clarifies that the original textile mill structure must still be either renovated or demolished — even if the original textile mill structure is now located on a separate sub parcel that is owned by an unrelated taxpayer. To mitigate risk in such situations, taxpayers should carefully review any contractual provisions with neighboring landowners.

In addition, the ruling clarified certain situations where a buyer of a textile mill site that has not yet been placed in service but has been partially rehabilitated would be required to file a new notice of intent with the Department of Revenue in order to claim rehabilitation expenses previously incurred by the seller. The ruling also clarifies that a buyer in this situation can only claim rehabilitation expenses incurred by the seller to the extent such expenses do not exceed the different between the purchase price paid by the seller and the purchase price paid by the buyer.

Key Takeaways for Developers Going Forward

Last week’s ruling provides developers and others in real estate with updated guidance on using South Carolina’s textile tax credit program. Developers that have a project that could benefit from these tax credits should consider partnering with outside counsel on questions of eligibility and the calculation of potential tax credits. Key questions to consider are: 

• Historical research of buildings in existence at the time the textile mill was abandoned.
   
• Whether a parcel is distressed.
   
• Whether a parcel is within the 1,000-foot rule.
   
• Whether a parcel is contiguous.
   
• Application of the 200% limitation.

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