December 7, 2021
IRS addresses low-income housing tax credits and 4% floor
In Revenue Ruling 2021-20 and Revenue Procedure 2021-43, the IRS addresses the 4% minimum credit rate (4% floor) for taxpayers using the low-income housing tax credit (LIHTC). The guidance clarifies when the 4% floor applies to projects that receive housing credit allocations or tax-exempt bonds both before and after the floor's effective date of December 31, 2020.
Taxpayers can qualify for the LIHTC by constructing new buildings or renovating existing buildings that have a certain percentage of rent-restricted units occupied by low-income tenants. IRC Section 42(b)(2) provides a minimum credit rate of 9% (70% subsidy) for non-federally subsidized new buildings. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021, set a minimum credit rate of 4% (30% subsidy) for new and existing buildings (1) to which the 9% floor does not apply and (2) that are placed into service and receive an allocation of housing credit dollar amounts after December 31, 2020. The 4% floor also applies to buildings that are financed in any part with a tax-exempt bond (exempt facility bond) if the bond is issued after December 31, 2020.
In determining when the 4% floor applies, Revenue Procedure 2021-43 creates a safe harbor for de minimis amounts of exempt facility bonds issued, or allocations made, after December 31, 2020. For exempt facility bonds, the Revenue Procedure defined de minimis as less than 10% of the financing of a particular building; for allocations, de minimis is less than 10% of the total allocations to the building that have been made on or before the date of the allocation in question.
Revenue Ruling 2021-20 addresses whether the 4% floor applies in three specific situations. In its analysis of each situation, the IRS considered whether applying the 4% floor would result in a windfall of tax credits for the taxpayer.
Situation 1: A building is financed in part with a draw-down exempt facility bond (more than $50,000 and 5% of the bond issuance) that was issued in 2020 and on which one or more draws are taken after December 31, 2020.
The 4% floor does not apply because the bonds were issued in 2020. In its analysis, the IRS said the bonds were considered issued in 2020 because (1) bonds issued under a draw-down loan are treated as part of a single issue, and (2) the issue date is the first date on which the aggregate draws under the loan exceed the lesser of $50,000 or 5% of the issue price (which occurred in this situation).
Situation 2: A building is financed in part with proceeds of an exempt facility bond that was issued in 2020 and in part with proceeds of a different exempt facility bond that is issued in a de minimis amount (less than 10%) after December 31, 2020.
The 4% floor does not apply because the bonds issued after 2020 were de minimis and thus fall under the safe harbor.
Situation 3: A building receives an allocation of housing credit dollars in 2020 and a de minimis additional allocation after December 31, 2020.
The 4% floor does not apply because the allocations issued after 2020 were de minimis (less than 10%) and thus fall under the safe harbor.
While taxpayers may have differing views as to whether the rules prevent windfalls or whether they prevent projects from getting the subsidy necessary to move forward, the IRS has laid out clear rules through its examples. The clear rules make it easier for project developers, tax credit investors, state allocating agencies and other parties to understand how much subsidy is available for each 4% project.