Computing Adjustments to the Allowable Annual Credit for LIHTC Properties
person
A.J. Johnson
today
12/06/2015
At the conclusion of an audit of a Low-Income Housing Tax Credit (LIHTC) taxpayer, the IRS will determine whether any adjustments to the amount of annual credit are appropriate. This will be done after auditing the eligible basis, applicable fraction, and applicable percentage. In many cases, it is as simple as computing the correct allowable credit and comparing it to the credit claimed by the taxpayer. Following is an example:
Eligible basis: $8,753,000
Applicable fraction: .7500
Qualified basis: $6,564,750
Applicable percentage: .0900
IRC §42 Credit per Audit: $590,828
Credit per Tax Return: $810,000
Adjustment: (219,172)
In other cases, more complex computations will be needed to account for:
Excess Qualified Basis;
Disposition or Acquisition of a Low-Income Building; or
Increases in Qualified Basis.
It is strongly recommended that adjustments to the credit be calculated using the format presented on Form 8609-A Part II, Computation of Credit.
Following is a summary of possible issues relating to the computation of credits.
Adjustments to Eligible Basis
The examination of eligible basis fundamentally requires consideration of five issues:
Character of the assets;
Cost of the assets;
When the cost was paid or incurred;
Whether costs were reasonably allocated among the assets; and
Whether the asset is continuously placed in service during the entire 15-year compliance period.
Based on the results of this analysis, the actual dollar value of assets includable in eligible basis will be adjusted as needed. Adjustments or limitations are applicable for:
Disproportionate standards;
Federal grants;
47 rehabilitation credits;
48 energy credits;
Supportive services for the homeless; and
Tax-exempt bond financing.
Eligible basis may also be affected by (1) the limitations on the cost of a community service facility, or (2) the increase for buildings located in high cost areas.
Adjustments to the Applicable Fraction
The IRS will examine four issues when determining whether or not to adjust the applicable fraction of a building:
Whether the units were occupied by an income qualified household;
Whether the rent for the units is correctly restricted;
Whether the units are suitable for occupancy; and
Whether the units are used on a transient basis (unless the units are SRO or housing for the homeless).
The applicable fraction is always determined on the last day of the taxable year.
Qualified Basis
Once adjustments to eligible basis and the applicable fraction have been made, adjustments and limitations applicable to qualified basis are considered. Issues here include:
Nonrecourse debt;
A building’s qualified basis is reduced by the amount of any nonqualified nonrecourse financing
Qualified basis deemed to be zero;
Ten-Year Credit Period has ended;
Generally, no credit is allowable for the 11th through the 15th year of the compliance period, with two exceptions:
Any credit not allowable because of the special rule for computing the applicable fraction for the first year of the credit period is allowable in the 11th year of the compliance period; and
The taxpayer may claim credit based on the "increase" in qualified basis associated with a low-income unit first qualifying for the credit after the first year of the credit period (the "2/3 credit").
Any decrease in qualified basis after the end of the ten-year credit is still subject to recapture, even though the taxpayer did not claim credit. The potential for recapture disappears at the end of the 15th year of the compliance period.
Disposition or Acquisition of a Low-Income Building During the Taxable Year;
Under IRC §42(f)(4), if a low-income building is disposed of during any year for which credit is allowable, the credit shall be allocated between the parties on the basis of the number of days during such year the building was held by each.
As explained in Revenue Ruling 91-38, the owner who has held the property for the longest period during the month in which a transfer occurs is deemed to have held the property for the entire month and may claim credit accordingly. If both the buyer and seller have held the property for the same amount of time during the month of transfer, the seller (transferor) is deemed to have held the property for the entire month.
Adjustments are not made when there is a change in the interests of the partners in the partnership. The partnership will reflect such changes in the amount of credit passed through to the partners.
Applicable Percentage
The examination of the applicable percentage requires consideration of the following:
When the low-income building was placed in service;
Whether the building is new or acquired; and
Whether the housing is financed with federal funding.
Accounting for Maximum Qualified Basis
As already noted, the law requires state housing agencies to limit the amount of credit allocated to a building so that it does not exceed the amount necessary to ensure the building’s financial feasibility as a qualified low-income housing project throughout the credit period. To accomplish this, state agencies usually limit the amount of qualified basis that will be permitted. This is reflected on line 3a of the 8609 "Maximum Qualified Basis."
If the actual qualified basis is more than the maximum qualified basis, then the state agency has allocated credit to support only a portion of the assets included in eligible basis. This limit on the allowable credit is accounted for on Form 8609-A, line 15. The taxpayer must compare the allowable credit as computed on the form to the amount actually allocated on Form 8609, line 1b. The amount claimed cannot exceed the amount allocated. The following example illustrates the circumstance when actual qualified basis exceeds the maximum qualified basis:
New building with cost certified eligible basis of $10,000,000;
Applicable fraction = 100%, meaning that actual qualified basis is also $10,000,000 ($10,000,000 X 100%);
State agency limited qualified basis on line 3a of the 8609 to $9,000,000;
The taxpayer has "excess" qualified basis of $1,000,000.
For audit purposes, any decrease in qualified basis must first be applied against the excess qualified basis. If there is enough excess basis, this can result in no negative tax consequences for the taxpayer. No adjustment is made to the allowable credit if the actual qualified basis after adjustment is equal to or more than the maximum qualified basis.
Noncompliance with Extended Use Agreement
Even though noncompliance may not result in a reduction of allowable credit, state agencies are expected to enforce the terms of the extended use agreement to the extent a taxpayer does not provide the low-income housing as agreed.
In summary, the calculation of allowable credit is based on eligible basis, applicable fraction, qualified basis and the applicable percentage. It is important that taxpayers include all eligible and qualified basis on Part II of 8609s, since excess basis may prevent a reduction in annual credits - even in the event of building noncompliance.