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Yearend 2020 Tax Bill: What It Means, What to Do
Affordable housing, community development and renewable energy stakeholders received good news at the end of a tumultuous 2020: the extension and expansion of several tax incentives.
The fiscal year 2021 omnibus spending bill signed in late December by President Donald Trump included a minimum 4% rate for the low-income housing tax credit (LIHTC), a five-year extension of the new markets tax credit (NMTC) and extensions of the renewable energy production tax credit (PTC) and investment tax credit (ITC). The $2.3 trillion legislation also included at least a $1.2 billion allocation of non-COVID disaster LIHTCs for 11 states and Puerto Rico and extension or expansion of several renewable energy provisions.
Another provision provides that real property trades or businesses that elect out of interest limitation should use a 30-year Alternative Depreciation System (ADS) for residential rental property placed in service before Jan. 1, 2018.
We are likely to see even greater expansion of many of these tax incentives during the coming months, due to the election of two Democratic Senators from Georgia, which gives their party control of both chambers of Congress and the White House.
Everyone involved in the affordable housing, community development and renewable energy communities needs to review the yearend 2020 tax changes, and assess how they affect their existing and planned investments and developments.
Here’s a look at what’s new and how they may affect your existing and planned investments and developments.
LIHTC: 4% Floor and More
A years-long campaign by LIHTC advocates reached fruition with the enactment of the 4% minimum rate for acquisition LIHTCs and tax-exempt private activity bond- (PAB-)financed properties.
The 4% minimum rate was a key provision in both the Affordable Housing Credit Improvement Act (introduced in the two previous sessions of Congress) and the Moving Forward Act (passed by the House last summer). The 4% floor–effective for acquisition credits allocated after Dec. 31, 2020, and for bond properties placed in service and financed by from PABs issued after Dec. 31, 2020–will make many developments financially feasible: Novogradac estimates that an additional 130,000 homes will be financed from 2021 through 2030 due to the 4% minimum rate.
The legislation provided an extra $1.2 billion in disaster LIHTC authority, and granted LIHTC properties in disaster zones an extra 12 months to satisfy the 10% test and the placed-in-service deadline. Allocation agencies were given authority to carry over the disaster LIHTCs to 2022 if needed.
The disaster credits go to 11 states and Puerto Rico (Novogradac estimates that about 64% of the credits will be allocated to California). Added to Novogradac’s estimated $3.3 billion bump in the LIHTC market due to the 4% floor (at current PAB levels), that’s a $4.5 billion potential increase in LIHTCs for 2021.
To-do list: The 4% floor will increase demand for each state’s volume cap. This follows a year in which more states adopted a competitive process for bond cap volume. Those bond cap allocating agencies should consider increasing the amount of bond cap allocated to affordable rental housing. Such agencies will also need to revisit the relative priorities for the use of bonds for residential rental housing, including mixed-income vs. 100% affordable and new construction vs. acquisition rehabilitation transactions. Developers seeking bond allocation will need to more closely monitor allocating agencies as they process these decisions and apply as early as possible.
The newly enacted 4% floor combined with the additional disaster area LIHTCs in the 11 states and Puerto Rico may will likely bring new developers to the affordable housing market, who should be aware of the need for guidance on the application, financial forecasts and market studies in order to ensure success.
ADS: From 40 Years to 30 Years
Many taxpayers with property placed in service on or before Dec. 31, 2017 chose not to opt out of interest limitations, because the depreciable life of their residential rental property would have been extended from 27.5 years to 40 years. The year-end legislation, retroactively, changes the 40-year life to a 30-year life, a decrease of 10 years. Those taxpayers who opted out of interest limitation on rental property placed in service before Jan. 1, 2018, and were thus subject to 40-year ADS, should now use a 30-year ADS
To-do list: Taxpayers with properties placed in service before 2018, that elected out of the interest expense limitation rules, now need to determine how to change to the 30-year life. Taxpayers who chose not to opt out of interest limitations, because of the then longer 40-year life, should now consider such a change.
NMTC: Five-Year Extension, Expansion
For the community development world, the five-year extension of the NMTC provides desired stability and an increase in funding.
The NMTC was extended though the 2025 round with an annual allocation of $5 billion, which means there are a minimum of five additional application rounds to be opened, with six more awards to be announced. The 2020 application round closed last year, but won’t be awarded until this summer.
The increase in allocation amount means the number of awards will likely increase to about 100 per year (over the past four $3.5 billion allocation rounds, the number of awards has varied from 73 to 76), which will have two likely outcomes: Initially, a higher percentage of CDEs winning an allocation (with 208 applications submitted for the $5 billion 2020 round, the percentage of applications to receive allocations will rise from the recent average of about 35% to 50%) and more applicants.
To-do list: More participants means that many organizations will upgrade their NMTC infrastructure and become more aggressive in their pursuit of an allocation. More allocation and more awards will mean more competition, making planning and preparation more important than ever. Consider lining up your team early.
RETCs: Extension of Incentives, Inclusion of Others
The omnibus legislation featured an extension of the PTC at 60% of its original amount for properties that begin construction by the end of 2021 (a one-year extension at that rate) and an extension of the phasedown rate of 26% for the ITC for properties that begin construction by the end of 2022. That rate would otherwise have dropped to 22% in 2021 and 10% in 2022.
Additionally, a 30% ITC was created for offshore wind through 2025. Waste energy recovery property was made eligible for the ITC only and “orphan” technologies–such as biomass, hydro and trash facilities–that began construction after Dec. 31, 2017, and before Jan. 1, 2021, will be eligible for the full ITC or PTC.
Two other significant provisions were extended. The IRC Section 179D commercial property energy efficiency deduction was made permanent. That deduction can be used for energy-efficiency upgrades and improvements in residential buildings of four or more stories above grade that reduce energy costs by 50% below industry energy-efficiency standards. The IRC Section 45L new energy-efficient home credit of up to $2,000 per unit in residential building of three or less stories above grade for energy-efficiency upgrades and improvements with similar cost energy cost savings–often used by LIHTC developers–was extended through the end of 2021. Both the 179D deduction and the 45L credit reduce LIHTC basis, but if a property has excess basis, it could still benefit from these energy efficiency incentives.
To-do list: More properties are eligible for the renewable energy tax incentives and developers should consider adding that funding to their capital stack, which requires decisions on the transaction structure, financial projections and more–none of them simple.
Affordable housing owners and developers should review which properties may qualify for the Section 179D deduction or 45L tax credit.
Still Ahead for 2021
Coming off a win at the end of 2020, affordable housing, community development and renewable energy advocates still have plenty of work to do with a new Congress and new president. So do historic preservation advocates.
Among the top legislative priorities for the new year include the remaining provisions in the AHCIA, such as an increase in per-capita and small-state 9% allocations (the temporary 12.5% increase in 9% authority expires at the end of the year), a 30% basis boost for rural areas and more. There remains a desire to make the NMTC permanent and able to offset the alternative minimum tax. Renewable energy advocates will push for further extensions of the PTC and ITC, as well as broader expansion the credits–particularly for storage devices.
None of the provisions of the Historic Tax Credit Growth and Opportunity Act, nor the HTC provisions of the Moving Forward Act, were part of year-end legislation, so advocates will continue to push for expansion for the HTC. Similarly, legislation providing reporting on or extending deadlines for the opportunity zones incentive was not part of the year-end legislation and will be a 2021 priority.
Meanwhile, tax credit appetite is an ongoing issue. The increase of several billion dollars in available credits, spread across multiple incentives, without a corresponding increase in demand for credits, could mean less tax credit equity is raised, particularly during a period when amount of taxes owed by corporations will likely be down due to the COVID-19-related economic recession. Time will tell how more credit availability affects the marketplace.
Community development, affordable housing and renewable energy advocates got good news in late 2020, but there remains work to do in 2021 to ensure maximum benefit from the most recent changes and to push for further expansion.