Administration Proposes Important Tax Credit Extensions and Modifications

Published by Michael Novogradac on Thursday, April 11, 2013 - 12:00am

The following are major proposals included in the Obama administration’s fiscal year 2014 budget related to the low-income housing tax credit, new markets tax credit and renewable energy tax credits. In a separate post, I will weigh in on the tax reform proposals, and other provisions of interest.

The budget proposes several changes to the rules governing low-income housing tax credits (LIHTCs):

Allowing states to convert some private activity bond volume cap into authority to allocate additional LIHTCs (page 37 of the Green Book)

  • For each $1,000 of PAB volume cap surrendered, the State would receive additional allocable LIHTCs for the calendar year equal to $1000 × twice the 4% tax credit percentage for December of the preceding calendar year. (3.16% for December 2012).
  • The aggregate amount of PAB volume cap that each State may convert with respect to a calendar year is 7 percent of the PAB volume cap that the State receives for that year.

Allowing LIHTC properties to comply with an income-averaging rule (page 39 of the Green Book)

  • Under the proposal at least 40 percent of the units in the project would have to be occupied by tenants with incomes that average no more than 60 percent of AMI. No rent-restricted unit, however, could be occupied by a tenant with income over 80 percent of AMI; and, for purposes of computing the average, any unit with an income limit that is less than 20 percent of AMI would be treated as having a 20-percent limit.

Changing the formula used to determine 9 percent and 4 percent rates (page 41 of the Green Book)

  • Under the proposal, the discount rate to be used would be the average of the mid-term and long-term applicable federal rates for the relevant month, plus 200 basis points. (However, the 30-percent present value credit rate for LIHTCs that result from bond financing would continue to be computed under current law.)

For April 2013:

  • 9% credit would be 8.26% versus 7.43%.
  • 4% credit would be 3.54% versus 3.19%.

Adding preservation of federally assisted affordable housing as an 11th selection criterion that QAPs must include. (page 43 of the Green Book)

Making LIHTCs beneficial to real estate investment trusts (REITs). (page 44 of the Green Book)

  • The proposal would permit a REIT that receives LIHTCs to designate as tax exempt some of the dividends that it distributes. Dividends so designated would be excluded from the gross income of the shareholders that receive them. The amount so designated could not exceed the quotient of the REIT’s LIHTCs for the year, divided by the highest corporate tax rate. If there is insufficient E&P to pay this amount of dividends, the unused authority to designate tax-exempt dividends could be carried forward indefinitely. Also, if a REIT or RIC is a shareholder that receives these tax-exempt dividends, the recipient could designate as exempt a corresponding amount of dividends that it distributes. In the case of any compliance failure, the REIT would be responsible for tax credit recapture as if it had used the credit to reduce its own tax liability. Under the proposal, the passive-loss and at-risk rules would not apply to the receipt of the exempt dividends.

The proposal would extend the new markets tax Credit (NMTC) permanently, with an allocation amount of $5 billion for each round. (page 31 of the Green Book)

  • The administration estimates that $250 million per round will support financing healthy food options in distressed communities as part of the Healthy Food Financing Initiative.
  • The proposal also would permit NMTC amounts resulting from QEIs made after December 31, 2012, to offset AMT liability.

The budget also proposes permanently extending the renewable electricity production tax credit and make it refundable. (page 19 of the Green Book)

  • In addition, the per kilowatt-hour production tax credit would be made available to electricity produced from solar facilities.
  • The refundable tax credit would be available for property on which construction begins after December 31, 2013.

The budget proposes an additional $2.5 billion in advanced energy manufacturing tax credits. (page 102 of the Green Book)

  • Applications for the additional credits would be made during the two-year period beginning on the date on which the additional authorization is enacted.

The budget proposes $2 billion in a new Manufacturing Communities Tax Credit. (page 12 of the Green Book)

  • The credit could be structured using the mechanism of the New Markets Tax Credit or as an allocated investment credit similar to the Qualifying Advanced Energy Project Credit.