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With a Divided Congress, 2023 Shaping Up as Year to Focus on Regulatory Guidance

Published by Michael J. Novogradac on Tuesday, January 3, 2023

Journal Cover January 2023   Download PDF

As affordable housing, community development and clean energy advocates digest 2022 federal election results and consider what a divided Congress means for enacting legislation in 2023 and 2024, one thing is clear: There will be an increased focus on regulatory guidance, which could make 2023 a landmark year.

The regulatory environment–inside and outside the executive branch of the federal government–greatly impacts the effectiveness and productivity of community development tax incentives.

From the executive branch, 2023 will see guidance from the Treasury Department on myriad provisions of the Inflation Reduction Act (IRA) as well as negotiations on global minimum tax (GMT). The U.S. Department of Housing and Urban Development (HUD) will release updated income limits and likely face funding challenges. The National Park Service may update historic preservation rules, while the Community Development Financial Institutions (CDFI Fund) and Department of Energy could update regulatory guidance for the new markets tax credit and various renewable energy incentives.

Outside the administration, 2023 will see bank regulators address Community Reinvestment Act (CRA) regulations and the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) will consider updated generally accepted accounting principles (GAAP) for tax credit investments.

Congress: Time to Reintroduce Legislation

While 2023 may be a year to focus on regulatory guidance, critical activity will lay the groundwork for potential legislative achievements. While there are no sure opportunities for tax-related legislation in 2023, history is filled with unexpected situations that resulted in such action. Two examples from the past 15 years are a deep recession (2007-09) and a global pandemic (2020).

Regardless, a new session of Congress means community development tax incentive legislation must be reintroduced. That means the Affordable Housing Credit Improvement Act (AHCIA), New Markets Tax Credit (NMTC) Extension Act, Historic Tax Credit Growth and Opportunity (HTC-GO) Act, Neighborhood Homes Investment Act and the Opportunity Zones Transparency, Extension and Improvement Act all will need to be introduced in the new Congress. That means lining up sponsors and co-sponsors and possibly tweaking language in bills introduced during the previous Congress–changes that may be necessitated by year-end legislation or by new priorities.

The only significant expiring federal tax provisions in 2023 and 2024 are aviation-related taxes, which are routinely extended unchanged in the Federal Aviation Administration reauthorization bill. Still, introducing tax-incentive bills and lining up significant support helps keep the issues in the forefront.

All eyes remain on 2025, when a plethora of tax provisions expire, including those passed as part of the bill formerly known as the 2017 Tax Cuts and Jobs Act (TCJA). The 118th Congress is an important runway for 2025 and there will still be plenty of movement in the executive branch.

Treasury Department: IRA Regulatory Guidance, Global Minimum Tax Talks

While the IRA was perhaps the most significant legislative accomplishment of last year, effects of the landmark climate bill will begin to be felt in 2023. Part of the reason is an expected series of regulations and other guidance issued by the U.S. Department of Treasury (as well as other agencies). In late November 2022, Treasury announced initial guidance on the labor standards required for enhanced clean energy and climate incentives, starting the 60-day clock for compliance.

That was just the start. It’s expected that there will be additional information requests related to that guidance and in coming months, Treasury is expected to announce guidance for many other provisions of the $700-plus billion legislation, including:

  • the transferability of tax credits,
  • elective payments for certain credits,
  • new energy-generation incentives,
  • energy efficiency of residential and commercial buildings,
  • and more.

Treasury will also likely issue guidance with respect to a 15% corporate minimum book tax included in the legislation. IRA-related regulatory guidance will be a major focus in 2023 and will likely continue into 2024 and the Novogradac Renewable Energy Working Group will continue to be engaged in those discussions.

Treasury will also be involved in a broader issue: a global minimum tax (GMT).

The Organization for Economic Co-Operation and Development (OECD) hoped to have more than 135 countries implement a 15% GMT before the end of 2022 for the world’s largest enterprises–firms that earn more than 750 million euros annually in two of the previous four fiscal years. It didn’t happen, but could come in 2023–with potentially significant effect on the community development tax incentive world.

The GMT could have chilling effects on tax credit equity investments unless provisions are made to clarify that an enterprise’s adjusted covered taxes are determined before any reduction for tax credits generated by equity investments. This interpretation would mean that tax equity investments would not affect the determination as to whether an enterprise’s effective tax rate fell below 15%. More importantly, this also would mean that tax equity investors would benefit from tax credit investments irrespective as to whether their effective tax rate was below 15%. OECD is expected to issue its next round of implementation guidelines soon (possibly between the time this column is written and published) and 2023 will be a crucial year for assessing the GMT’s effect on tax credit equity investments.

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HUD: Income Limits Change?

In early December 2022, HUD announced its methodology to determine rent and income limits for LIHTC properties in 2023: Those figures will be based on 2021 American Community Survey (ACS) data with an inflation adjustment.

Limits are generally based on ACS data from three years previous, but the pandemic led to unreliable data from 2020, so HUD will use two-year-old data for the 2023 and release the limits six weeks later than usual. What’s unknown is whether 2023 is a one-year outlier or if HUD will indefinitely shift to using two-year old data. If HUD reverts back to using three-year old data, then 2024 income limits would generally be similar to 2023 data updated for inflation. The Novogradac Income Limits Working Group will continue to be involved in giving feedback during the process.

HUD also faces a challenge with the fiscal year 2024 budget–due Sept. 30–which will likely see a reduction as the Republican-controlled House of Representatives bargains with a Democratic president. Public housing funding will likely drop, similar to what was common during the Obama administration, which may increase the focus on Rental Assistance Demonstration (RAD) conversions for public housing.

National Park Service: Administration of HTC

While historic tax credit (HTC) proponents promote the HTC-GO Act, members of the Historic Tax Credit Coalition (HTCC) are engaged in discussion with the NPS on issues related to the administration of the credit. HTCC government relations consultant Patrick Robertson says those talks include a range of issues; from the length of time it takes to review a project to more specific topics. Robertson said he expects movement on a number of issues in 2023, in informal or formal NPS guidance.

Banking Regulators: Finally, Time for a CRA Update?

Outside the executive branch, this is most certainly the year for the first significant interagency revision to Community Reinvestment Act regulations since 1995.

The CRA, enacted in 1977, is one of the most important federal policies for affordable housing and community redevelopment financing. The CRA broadly requires that banks invest in the communities in which they do business, and banks governed by the CRA are responsible for 75% to 85% of LIHTC equity investment, virtually all NMTC equity investment and much of the RETC and HTC equity investment. The three agencies that regulate federal banking–the Federal Reserve Board of Governors (Fed), Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC)–issued a notice of proposed rulemaking last spring and asked for (and received) comments. The new proposals were seen as an improvement over regulations imposed and later withdrawn by the OCC in 2020, but there were significant concerns: Many stakeholders said CRA regulatory reform–particularly a proposal equating tax credit equity investment and loans for community development–could have a chilling effect on investment. As in the past, multiple Novogradac working groups will continue to be involved in discussions with the regulatory agencies.

FASB: Expand LIHTC GAAP to Other Credits?

How tax equity investment is addressed accounting has a major role in investment strategies, and this could be the year things shift.

A 2014 FASB ruling allowed the proportional amortization method of accounting for LIHTC investments that meet certain qualifications under GAAP. That ruling did not include other community development tax credits, but the EITF reached a consensus in December 2022 to expand the proportional amortization method to other tax credit programs, setting the stage for FASB to make that stance official, possibly as soon as the organization’s January meeting. Allowing that change would make additional tax credit equity investing much more attractive to many investors.

New GAAP consensus would likely be effective for reporting periods made after a certain date in late 2023, which means that for much of the year, proportional amortization would still be available only to LIHTC investments. But it would be a significant change and the Novogradac GAAP Working Group will continue to provide feedback on this issue.

Big Year

For community development tax incentive stakeholders, 2023 is shaping up as the year to focus on regulatory guidance. Whether it’s the executive branch of the federal government, banking regulating agencies, FASB or another regulatory agency, the next 12 months could see seismic movement on how tax credits are valued and accounted for by investors and developers.

Concurrent with seeking regulatory guidance, tax incentive stakeholders will be watchful for opportunities to achieve legislative achievements in 2023 and early 2024. As the general election of November 2024 gets closer, legislative achievements are less likely. But the near certainty of major tax legislation in 2025 means that stakeholders must in 2023 and 2024 be active on the legislative front to be the best position to advocate for critical affordable housing, community development and renewable energy tax incentives when Congress addresses extension and revision of expiring provisions enacted as part of the 2017 TCJA.

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