IRS issues guidance on Low-Income Housing Tax Credit (LIHTC) fixed 4% rate
The Consolidated Appropriations Act, enacted in late 2020, amended Internal Revenue Code (IRC) Section 42(b) and established a minimum 4% credit rate for qualifying Low-Income Housing Tax Credit (LIHTC) projects. To qualify for the 4% minimum credit rate, a building must be placed in service after Dec. 31, 2020, and have received an issuance of tax-exempt bonds or an allocation of credits after Dec. 31, 2020.
A 4% floor had been a longtime goal of affordable housing advocates, and the industry welcomed its arrival, but questions regarding its application to existing projects were immediate. In early December 2021, the IRS released long-awaited guidance (Revenue Ruling 2021-20 and Revenue Procedure 2021-43) surrounding the 4% minimum credit rate. The wait did not disappoint; the guidance clarifies the IRS’s position regarding the applicability of the 4% floor to three common potential scenarios.
- Situation 1 is a project financed with tax-exempt bonds issued in 2020 and drawn down, at least in part, after Dec. 31, 2020.
- Situation 2 is a building that is financed with both a 2020 bond issuance and a separate, additional 2021 (or later) bond issuance.
- Situation 3 is a project that received an allocation of tax credits in 2020 and an additional allocation after Dec. 31, 2020.
The guidance notes that while the language in the Consolidated Appropriations Act established a “placed in service” threshold (Dec. 31, 2020), similar to the 9% minimum set in 2008, it also requires specific government action, which is a departure from the language used to establish the 9% minimum. The IRS goes on to state that the insistence on government action is a clear indication that the 4% floor was designed in a way to avoid potential windfalls for housing credit projects that had already been structured and had sufficient funding (and credits) before the implementation of the 4% minimum.
In Situation 1, the IRS makes clear that in the case of draw-down bonds, for the 4% minimum, the bonds are, as defined in Treasury Regulation Section 1.150-1(c)(4)(i), treated as a single issue with a date of issuance as of the first date that aggregate draws exceed the lesser of $50,000 or 5% of the issue price. As such, any project that received a 2020 draw-down bond issuance and drew at least $50,000 or 5% of the total issuance before Dec. 31, 2020, would not be eligible to use the 4% floor. Projects placed in service after 2020 that received a draw-down bond issued before Dec. 31, 2020, but did not draw the minimum amount in 2020 would be eligible for the 4% minimum credit rate.
In Situation 2, the IRS contemplates a building financed in part with tax-exempt bonds issued before Dec. 31, 2020, and, in part, with a separate, additional issuance of tax-exempt bond proceeds issued after Dec. 31, 2020. In its analysis, the IRS relies on the definition of "de minimis" as provided in Revenue Procedure 2021-43. In short, if a project receives a subsequent bond issuance after Dec. 31, 2020, that is deemed de minimis (less than 10% of aggregate tax-exempt bond issuances), it would not qualify for the 4% minimum credit rate. If, however, the subsequent (post-2020) issuance is equal to or greater than 10% of the total tax-exempt bond issuances, the project is able to utilize the 4% floor.
A numerical example may be helpful to understand the de minimis rule. Assume the building owner has $10 million of tax-exempt volume cap bond financing that was issued in 2020. Because of cost overruns, the owner arranges to borrow an additional $2 million in 2022 to complete the construction of the building. The new bonds are approximately 16.7% of the total $12 million of tax-exempt bonds, so the building qualifies for the fixed 4%. If they got only $1 million of new bonds, they would fail the de minimis test with only 9% of new bonds, and would not be able to use the fixed 4%.
Situation 3 mirrors Situation 2 but focuses on the allocation of tax credits rather than the issuance of tax-exempt bonds. The question is whether the 4% floor may be used for the acquisition portion of a 9% credit project that received its allocation in 2020. The IRS uses the same definition of de minimis for credit allocations as it does for bond issuances (10% of the aggregate credit allocation). Similar to Situation 2, if the building is placed in service after Dec. 31, 2020, and the additional tax credit allocation is 10% or more of the total allocation, the building qualifies for the 4% floor.
Overall, the IRS was straightforward in its communication, and the situations presented mirror those most likely to be encountered. Every transaction is different, so please contact our team to better understand how this guidance may impact you.
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