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Year-End Tax Planning Considerations for Developers


12/8/2016
 
This article was distributed as part of the December 2016 Affordable Housing News & Views.
 
As we come to the end of the year, many of our developer clients are calling or e-mailing with tax-related questions. A number of the questions pertain to buildings that are under construction with completion anticipated this year.
 
Asking questions now is good thing because some type of corrective action often has to be taken before year end. With this in mind, here are a few items to think about now.
 
Know your tax credit equity adjusters. There are many varieties of tax credit adjusters. The most common are based on the total amount of tax credits delivered and the amount of tax credit delivered in the first year.  The actions that owners take now, as well as those that have been taken since buildings were completed and rented up, can have a tremendous impact on these adjusters.  Know how many credits have been promised to the investor by looking at your partnership or operating agreement.  In many cases, your investors have been in contact with you requesting information on building completion and qualified occupancy. They are using this information so they can provide an estimate of expected tax credits to the fund investors.  Even with updated information, estimates can go astray.
 
The first year credit is founded on the eligible basis of the building at the end of the year and the qualified occupancy for each full month in the year that the building is in service.  In most cases, an owner will not want to start taking credits on a building unless the construction is substantially complete. That’s because the eligible basis is locked in at the end of the first year of the credit period.  The owner may decide to start credits on a building if it has more eligible basis than is necessary to support the tax credit allocation. 
 
The planning tip is to complete construction on buildings especially in a multi-building project.  You don’t want to be 85% complete on ten buildings – it would be better to be 100% complete on eight buildings and 50% complete on the other two.
 
The second part of the first year credit calculation is the qualified occupancy for each full month that the building is in service. The placed in service date for a newly constructed building for purposes of IRC Section 42 is the date that the first unit in the building is suitable for occupancy. The definition of placed in service for a building that is occupied at acquisition, and through rehabilitation, is based on the date of acquisition. To determine the occupancy to be used for the first year credit calculation, look at the number of full months that the building is in service as well as the qualified occupancy at the end of each of those months.  For new construction buildings placed in service after December 1st of this year, no 2016 credits can be claimed in 2016.  For a building that is occupied during its rehabilitation, you will need to look at the number of full months in the year from the date of acquisition.    
 
Finally, the goal is to get buildings fully rented at their target occupancy level by the end of the year. If the plan is to start credits in 2016, and the building is to be 100% low-income, it is crucial to get the building fully rented to avoid a 2/3 credit on the units that are unrented as of December 31.  The 2/3 credits are available over the remaining compliance period. Therefore, you will never get the full amount of the credit on those unrented units and this could result in an equity credit adjuster.
 
Once all these pieces have been pulled together, credits will have to be calculated for the draft tax return that is usually due to the investor in late January through early March.  If the cost certification is not final, the eligible basis needs to be estimated.
 
Investors require the best possible calculations by the deadlines prescribed in the partnership agreement. Therefore, it is important to try to finalize the cost certification. If this is not possible due to construction completion that is close to year-end or other issues, work with your CohnReznick advisor to get as close as possible to the final expected eligible basis. This process can start immediately. It is much easier to handle these estimates now rather than in the height of tax season.
 
Is there a loss reallocation in your deal’s future?  A loss reallocation during the tax credit period could initiate a reallocation of tax credits that results in a tax credit equity adjuster. Situations that can lead to allocation issues include construction overruns that were paid for with related party debt, development fees that are being paid more slowly than projected, general partners or other partners with substantial capital accounts, and deals that have operating deficits. The reallocation usually occurs when the limited partner’s tax capital account gets to zero.
 
Discussing potential issues like this should be part of your year-end tax planning meeting with your CohnReznick service team. There are a number of possible remedies and it is best to start working on them now.  
 
Other items to consider. You should have a written policy in place related to expensing of repairs. This written policy is necessary to take maximum advantage of the repair regulations that came out a few years ago. If you need more information on this matter please contact your CohnReznick tax professional.  
 
Also, note that the Federal partnership filing deadline is March 15, 2017 for partnerships with a December 31, 2016 year-end. Many states have revised their filing deadline so you should contact your CohnReznick tax professional to discuss how this could impact your situation.
 
Warning. The examples provided are general suggestions and the facts in your deal may vary. Don’t rely on general advice. Instead, make sure you are getting the advice that is most appropriate for your specific situation.
 
Contact
 
For more information, please contact Beth Mullen, CohnReznick partner and National Director of the Firm’s Affordable Housing Industry Practice, at beth.mullen@cohnreznick.com or 916-930-5750.
 
 
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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