This month, in the Journal’s annual low-income housing tax credit (LIHTC) issue, we’re going to consider strategies and consequences of pairing LIHTCs with renewable energy tax credits (RETCs).

For this purpose, we’ll be discussing solar investment tax credits (ITCs), although wind (including small wind) and geothermal may give rise to similar tax credits, often with different timetables and percentages. And, of course, the timetables and rates are the subject of frequent legislative proposals and IRS guidance. It’s crucial to double-check for the latest rules before undertaking a project.

First, let’s consider the basics. Here’s how LIHTCs and RETCs are similar:

• they are both computed as a percentage of the cost of eligible property; and
• depending on the facts, both credits can be claimed on the same expenditures.

Here’s how they are different:

• The LIHTC is claimed over 10 years; the RETC is claimed all at once;
• The LIHTC investor can enter the deal after the facility is “placed in service” and still claim most (or even all) of the LIHTC; in general, the RETC accrues on placement in service, although deferral may be possible;
• The LIHTC does not have any basis reduction; the RETC generally does, although, again, basis reduction can be avoided with a more complex deal structure. The RETC basis reduction for non-lease-pass-through transactions is 50% of the credit. For example, a $500,000 pre-2020 project would generate 30% of $500,000, or $150,000 in credits, and results in a $75,000 basis reduction for depreciation and LIHTC (where applicable) purposes;
• LIHTCs are shared by partners/members of a partnership/LLC in accordance with allocations of depreciation, while RETCs are shared in accordance with allocations of profit;
• The actual amount of the LIHTC must be approved by a state agency; the RETC is claimed as of right.
• The credit percentage for the RETC can vary based on when the project began construction (30% for pre-2020, 26% for 2021-22, 22% for 2023, provided the project is placed in service before 2024; otherwise, 10%). The LIHTC percentage is generally locked at 9% or 4% (times 10 years, so 90% or 40%), depending on whether the property is new construction or substantial rehabilitation that is not bond financed (9%), or acquisition of an existing building and/or bond financed (4%).

Now, let’s consider some basic deal structures:

• LIHTC partnership owns solar, and uses it to provide its own or its tenants’ energy needs. As part of the housing development and benefiting the one project or the tenants, the cost of the solar should qualify for both the LIHTC and the RETC. Indeed, in an appropriate situation, the credits can exceed the cost of the facility. For example, consider a $1 million solar facility on a 9% LIHTC project that began construction in 2021 and was placed in service in 2024. The total credits would be 26% times $1 million, or $260,000 of RETCs, plus as much as 9% times 10 years times $1 million less $130,000, or $783,000 of LIHTCs, a total of $1,043,000. But don’t miss the discussion of timing in the next section;
• LIHTC partnership owns solar, and uses it to sell electricity to the grid. This constitutes commercial use of the solar and is therefore eligible for the RETC, but not the 4%/9% (times 10 years) LIHTC;
• LIHTC partnership leases its roof to a solar company and does not own the solar. Since the partnership doesn’t own the solar at all, it cannot claim either credit. The dual use of the roof (for both housing and as a base for the solar) might cause a small portion of the roof’s cost to be disqualified from the LIHTC. In general, we haven’t seen investors or their tax advisers worry about this, unless the roof requires special-renewable related improvements.

Next, some timing considerations:

• solar and housing owned and operated by the same entity and all placed in service before the end of the first year of the LIHTC credit period: The LIHTC is computed based on the project’s basis at the end of the first year of the LIHTC credit period. Assuming the renewable energy property is eligible for the LIHTC, this timing will qualify the renewables for the LIHTC;
• solar and housing owned and operated by the same entity, but solar placed in service in a later year than the housing: Suppose, for example, that the project determines to add solar to the facility in a later year, after the first year of the LIHTC credit period. This addition will only be eligible for the applicable RETC (based on when the project began and was placed in service). Moreover, it can be hard to get an LIHTC investor to invest more capital in a later year, when a new investment analysis and approval may be required.

Finally, some allocation considerations:

• solar and housing owned and operated by the same entity; all credits allocated 99.99% to the LP: Of course, this looks the most straightforward. But note a few potential problems. Most notably, the RETC is shared in accordance with profits and subject to a five-year recapture period. This will inspire the typical investor to not allow incentive management fees to be paid to the general partner for the first five years, for fear that they constitute the allocation of profits to the general partner which can result in the RETC being allocated to it (and not the investor). Indeed, this may inspire the developer to prefer to not market the RETC to the investor;
• solar and housing owned and operated by the same entity; LIHTC allocated 99.99% to the LP; solar credits allocated 100% to GP: The regulations allow a partnership to all aspects of an item of property (e.g., a solar facility) to a partner. This works well if the solar only qualifies for the RETC (for example, where the solar is added later), and a bit less well where it results in the developer also getting the LIHTC associated with the facility (if available).
• housing owned by the LIHTC partnership; solar facility owned by the developer or another entity: This can be the easiest way to monetize the pure RETC, remembering that it concedes the LIHTC for solar (presuming it was available).

Obviously, there are a lot of choices and decisions here. It may be a good idea to have the accountants run the numbers in a few ways in order to select the best structure. And, as always, it is a good idea for the developer, investor and the state agency to resolve their relationship as early as possible in order to maximize the available benefits.