Dayton Arcade project aided by tax credits. How do they work?

The downtown Dayton Arcade project was awarded historic tax credits this week. The $5 million in incentives, baffling to some, should propel the plan forward.

Tax credits are sometimes misunderstood to be direct cash payments from the government to developers. Tax credits are also often confused with tax deductions.

So what’s the difference?

A tax deduction reduces the amount of taxable income. A tax credit reduces the amount of taxes owed on the taxable income.

Tax rates have no bearing on tax credits, because credits are subtracted dollar for dollar directly from the amount of taxes owed.

Credit: Tom Gilliam

Credit: Tom Gilliam

When it comes to historic projects like the Arcade, developers say they need the tax credits to bridge the cost and financial risk incurred rehabilitating impossible-to-replicate buildings in disrepair.

Personal tax payers also take advantage of tax credits. Among the top federal credits are the the earned income, child and dependent care, and non-refundable education credits.

Most tax credits are non-refundable, meaning if a credit reduces a tax liability to zero, any excess can’t be carried forward in future years.

The Arcade and other projects like it often use a mix of tax credits. Project developers of the Arcade also received $20 million in low-income housing tax credits to be spread over 10 years.

Stipulations typically prevent recipients from claiming the tax credits should a project not be completed as specified in the application requirements.

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