In January 2021, the IRS published Notice 2021-12, extending and expanding on the COVID-19 relief provided by Notice 2020-53 that was issued in July 2020.
Section IV.E of Notice 2021-12 provided an extension to satisfy certain occupancy obligations. It stated that for purposes of Section 42(f), “if the close of the first year of the credit period with respect to a building is on or after April 1, 2020, and on or before June 30, 2021, then the qualified basis for the building for the first year of the credit period is calculated by taking into account any increase in the number of low-income units by the close of the 6-month period following the close of that first year.”
Section 42(f) is “Definition and special rules relating to credit period.” This section includes special rules for the first year of the credit period, including how the applicable fraction is determined for the first year. Since the applicable fraction is used in the determination of qualified basis, Notice 2021-12 seemed to indicate that the six-month extension applied to any determination of first year qualified basis. This would mean that units qualified after then end of the first year of the credit period, but within the six-month extension, would qualify for first year credits.
On March 16, 2021, the IRS issued Notice 2021-17, which will be included in the April 5, 2021 Internal Revenue Bulletin. This notice provides a more precise reference citation, clarifying that Section IV.E of Notice 2021-12 applies only for purposes of §42(f)(3)(A)(ii). This section of the code stipulates that units qualified after the first year of the credit period will only be entitled to 2/3 of the credit that units qualified during the first year of the credit period may claim. This clarification indicates that increases in qualified occupancy during the six-month extension may be used to avoid two-thirds tax credits in the future but may not be used to actually claim first-year credit for units not qualified during the first year. In other words, units qualified after the first year of the credit period but within the six-month extension, will be able to claim accelerated credit beginning in the second year of the credit period. Units qualified during this extension will not be entitled to credits during the first year of the credit period.