Sign Up For Novogradac Industry Alert Emails

How to Qualify under Category 3 or 4 of the Low-Income Communities Bonus Credit Program

Published by Dirk Wallace on Thursday, November 9, 2023 - 12:00AM

With the Low-Income Communities Bonus Credit program 2023 application now open, it’s important to understand the financial benefits and what the Internal Revenue Service (IRS) will require for eligibility.

This discussion explores what is required to be considered a qualified low-income residential building project (Category 3) and a qualified low-income economic benefit project (Category 4).  

Background

Authorized by the Inflation Reduction Act, the program provides “adder” investment tax credit (ITC) percentages for solar or wind facilities built in low-income communities or in connection with federally subsidized residential buildings, including low-income housing tax credit properties, as well as facilities that benefit households with lower incomes (at least 50% of the energy produced by these facilities must serve households with incomes below 80% of the area median income).

This is a follow-up to “Get Ready to Apply for the Low-Income Communities Bonus Credit Program” blog, which discusses how to apply for the program now that the 30-day application window is open.

The Low-Income Communities Bonus Credit program is allocated into four categories.

novogradac-bonus-credit-program-categories-11092023.png?itok=vIe3SabB
Click to Enlarge

 

Category 3

To meet the conditions of a Category 3 facility, the financial benefits of the electricity produced by the facility (qualified solar or wind facility) must be allocated equitably among the occupants of a qualified residential property (property), which can be either a multifamily rental property or single-family rental property. At least half of the financial value of the energy produced by the facility must be equitably allocated to the property's low-income occupants under the covered housing program or other affordable housing program.

There are two different options to ensure an equitable allocation of financial benefits:

  1. If the financial value of the energy produced by the facility is distributed via utility bill savings, at least half of the financial value must be distributed as utility bill savings in equal shares to each building unit among the property's occupants or distributed proportionately among the tenants based on the low-income unit's square footage, or number of occupants.
  2. If the financial value is not distributed via utility bill savings, at least half of the financial value of the energy produced by the facility must be distributed to occupants using one of the methods described in the HUD guidance. Some examples of benefits that can be provided to tenants are:
  • Job training and workforce development,
  • Facility upgrades,
  • Wellness programs or services,
  • Free or reduced cost for high-speed internet service,
  • Job training and workforce development,
  • Financial literacy programs and services,
  • Community events and/or support for resident associations,
  • Additional support staff, or
  • Shuttle services.    

Under Category 3, the facility must prepare a benefits sharing statement, which includes:

  1. Both the facility’s net and gross financial value,
  2. Financial value required to be distributed to building occupants,
  3. Description of the method in which the financial value will be distributed to the building occupants, and
  4. If the facility and property are separately owned, an indication of which entity will be responsible for the distribution of benefits to the occupants. 

In addition to the benefit sharing statement, the property owner must also formally notify the occupants of the units in the property of the development of the facility and the planned distribution of benefits.

Category 4

To satisfy the requirements of a Category 4 facility, the facility must:

  1. serve multiple qualifying low-income households with income less than 200% of the poverty line or below 80% of area median gross income (qualifying household),
  2. have at least half of the facility's total output in kilowatt must be assigned to qualifying households, and
  3. provide each qualifying household a bill credit discount rate of at least 20%. 

Unlike the options for distribution methods that are available for Category 3 projects, Category 4 projects must be linked to a household’s utility bill. In all instances, the bill credit discount rate is calculated on an annual basis.

A bill credit discount rate is calculated using the formula below:

novogradac-bill-credit-discount-rate-a-11092023.png?itok=31fl7D4M
Click to Enlarge

 

In cases where the qualifying household has little or no cost of participation, the bill credit discount rate should be calculated as follows:

novogradac-bill-credit-discount-rate-b-11092023.png?itok=yTJgxJ_J
Click to Enlarge

 

To support that financial benefits are provided to qualifying households, applicants must submit documentation upon placing the qualified solar or wind facility in service that identities:

  1. Each qualifying household,
  2. Output from the facility allocated to each qualifying household in kilowatts, and
  3. Method of income verification utilized for each qualifying household. A qualifying household's low-income status is determined at the time the household enrolls in the subscription program and does not need to be re-verified.

Applicants may use categorical eligibility or other income verification methods to support that a household is a qualifying household. Proof of the household's participation in a needs-based federal, state, tribal, or utility program is needed for categorical eligibility. An individual in the household must currently be approved for assistance with an award letter or other form of documentation within the last 12 months of enrollment in the program.

Federal programs may include, but are not limited to:

  • Medicaid,
  • Low-Income Home Energy Assistance Program administered by the Department of Health and Human Services,
  • Weatherization Assistance Program administered by the Department of Energy,
  • Supplemental Nutrition Assistance Program administered by the Department of Agriculture (USDA),
  • Section 8 Project-Based Rental Assistance,
  • Housing Choice Voucher Program administered by HUD,
  • Federal Communication Commission's Lifeline Support for Affordable Communications,
  • National School Lunch Program administered by the USDA,
  • Supplemental Security Income Program administered by the Social Security Administration, and
  • Any verified government or nonprofit program serving Asset Limited Income Constrained Employed persons or households.

Other methods of income verification include paystubs, federal or state tax returns, or income verification through crediting agencies and commercial data sources can be used to establish that a household is a qualifying household. A self-attestation is not an acceptable method to establish a household is a qualifying household.

Important Deadline Approaching

Time is of the essence as the 30-day window for the application process opened Oct. 19 for the 2023 Low-Income Community Bonus Credit program.

Learn more about Novogradac's expertise and many services