The IRS has issued final regulations (TD 9850) that amend the Section 42 low-income housing credit "utility allowance" regulations to extend their submetering principles to situations in which a building owner sells to tenants energy that is produced from a renewable source and that the owner did not purchase from or through a local utility company.

Background

In March 2016, the IRS issued final, temporary and proposed regulations (TD 9755, REG-123867-14) amending the rules concerning the Section 42 low-income housing credit. The 2016 final regulations clarified when utility costs paid by a tenant and based on actual consumption in a submetered, rent-restricted unit are treated as paid by the tenant directly to the utility company and not to the building owner. In that case, the 2016 final regulations specified that, for purposes of Section 42, the tenant's payments to the owner for the utilities are not treated as payments of gross rent.

The 2016 temporary regulations (and, by cross-reference, the 2016 proposed regulations) extended the principles of the 2016 final regulations to situations in which a building owner sold to tenants energy that was produced from a renewable source and that the owner had not purchased from or through a local utility company.

New final regulations

With some amendments in response to comments received, the new final regulations adopt the 2016 proposed regulations to apply the submetering principles to energy that (i) the building owner sold to tenants, (ii) was produced from a renewable source, and (iii) the owner had acquired without the intervention of a local utility company.

Qualifying for submetering treatment depends on the charges to the tenants for the energy being comparable to local utility rates. Under the 2016 temporary and proposed regulations, the rate charged could not exceed the rate that a local utility company would have charged. A commenter asked for some clarifications about how to satisfy this requirement. In response, the new final regulations make two amendments. First, when energy could have been obtained from more than one local utility company, the final regulations clarify that the rate charged must not exceed the highest local utility rate; the IRS stated that it considers such an approach more administrable than one requiring owners to charge no more than a "typical rate." Second, in establishing rates, the final regulations specify that the owner may rely on the rates published by local utility companies.

Under the 2016 temporary and proposed regulations, for purposes of qualifying for submetering treatment, energy is "produced from a renewable source" if it is: (a) energy that is produced from energy property described in Section 48; (b) energy that is produced from a facility described in Section 45(d)(1), (2), (3), (4), (6), (9), or (11); or (c) energy that is described in guidance published for this purpose in the Internal Revenue Bulletin. The new final regulations clarify that the building owner need not own the source from which the utility is produced and need not qualify for, or receive, any credit under Section 45 or 48 associated with the source.

Implications

The final regulations provide additional clarity over the previous proposed regulations, especially regarding the appropriate rate for submetered renewable energy. To date, we have seen many low-income housing credit properties with solar panels limit solar electricity use to common areas. As such, this could represent a new revenue stream for the property owners and may result in more renewable energy being sited on low-income housing credit properties.

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