The IRS has published a proposed regulation that will amend the IRS utility allowance regulation 1.42-10. This regulation outlines requirements relative to utility allowances on low-income housing tax credit buildings. The proposed regulation updates 1.42-10 to clarify that utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company. The proposed regulation affects owners of LIHTC properties that claim the credit, the tenants in those projects, and the Housing Credit Agencies that administer the credit.
When the IRS amended Regulation 1.42-10 on July 29, 2008, the Service did not address the issue of Submetering, and the way the regulation was written required that, since the tenants in a submetered building would be paying the owner for utilities and not making payment directly to the utility company, any payment to the owner would be considered rent and no utility allowance would be permitted for submetered utilities. After comments from the industry on why this requirement would be harmful to properties, and would not encourage conservation, the IRS published Notice 2009-44, clarifying that for purposes of 1.42-10, utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company, and not by or through the owner of the building. The amount paid by the tenants cannot exceed the amount they would pay if they paid the utility company directly, except that a reasonable administrative fee of $5.00 per unit per month (unless State law provides otherwise) may also be charged, and would not be considered rent.
While direct Submetering of utilities is acceptable to the IRS for purposes of establishing a utility allowance, ratio utility billing systems (RUBS) will not be an acceptable means of billing residents for utilities for the purpose of establishing a utility allowance. What this effectively means is that if a property uses any type of RUBS system for tenant payment of utilities, those charges will be considered rent, and not subject to any approved utility allowance.
The proposed regulation also makes clear that state housing agencies may require certain information before a particular method can be used, or they may disapprove use of a method.
The proposed regulation makes two important modifications to Notice 2009-44. First, if two or more utilities such as electricity and water are submetered, then the building owner or agent must separately state the amount billed to the tenants for each submetered utility. Second, if an owner imposes an administrative fee for Submetering, the fee may not be more than the lesser of (1) $5.00 per month; or (2) the actual monthly costs paid or incurred for administering the arrangement (whether internal costs or amounts paid to third parties). The owner’s actual costs include internal costs (such as amounts paid to employees) and external costs (such as amounts paid to third party service providers) for administering the Submetering arrangement, as well as that month’s portion of costs that relate to the Submetering equipment and that are not included in eligible basis. Any amount charged in excess of the lesser of $5.00 per unit per month or actual administrative costs will be considered rent.
As noted, this is a proposed regulation. It will not be made final until after a public hearing (to be held on November 27, 2012) and written comments are received and considered. Until the regulation is made final, taxpayers may continue to rely on the current IRS Regulation 1.42-10 and Notice 2009-44.