A Year of Pandemic: IRS Guidance, What’s Needed, What to Do

Published by Michael Novogradac on Monday, March 1, 2021
Journal Cover Thumb March 2021

This month marks a year since the COVID-19 pandemic shut down much of the world. Over the past 12 months, community development stakeholders adjusted to a new reality while the Internal Revenue Service (IRS) provided guidance to help them cope with the pandemic and its economic effects.

The IRS issued guidance that extended deadlines, tolled compliance measurement periods and provided other much-needed relief. The guidance enabled many affordable housing, community development, historic preservation and renewable energy properties and participants to avoid the economic destruction that would have ensued without such relief. More relief and clarifying guidance are needed from the IRS as we slowly emerge from the pandemic and its related recession.

Fear, then Next Normal

On March 13, 2020, President Donald Trump declared a national state of emergency and within five weeks, 43 states entered a lockdown. Community development stakeholders feared the worst: Construction would halt, tenants would be unable to pay rent and tax credit equity pricing would decline drastically.

Fears were realized, but the worst didn’t happen.

In many states, construction was defined (at least temporarily) as an “essential service,” allowing building to continue with COVID-19 protection for workers. A combination of factors–federal, state and local rental assistance; eviction moratoriums; and a desire by tenants to retain their homes–led to a smaller decline in residential rental income than feared. Equity prices for tax credits dropped, but generally not to the levels of the Great Recession.

And the IRS provided relief, often multiple times, to help keep the pandemic from causing existing properties, developments and investments to fail to meet requirements for various tax incentives. The guidance was at least partly due to letters to the IRS by various stakeholders to identify and specify the relief needed–including letters submitted by the various Novogradac tax incentive working groups.

IRS Guidance

Three weeks after President Trump declared a national state of emergency, the IRS issued its first pandemic-related, tax-incentive guidance. IRS Notice 2020-23 extended low-income housing tax credit (LIHTC) deadlines for the 10% of reasonably expected basis test, the 24-month period for minimum rehabilitation expenses, annual owner certification of compliance and other time-sensitive issues. The guidance also extended the 180-day investment deadline for opportunity zones (OZ) investors. Those deadlines–and others for the LIHTC and OZ incentives–were extended multiple times.

Within a few months, the IRS also provided extensions of deadlines for the new markets tax credit (NMTC), historic tax credit (HTC) and renewable energy tax credits (RETCs).

NMTC stakeholders received extensions until Dec. 31, 2020, for many time-sensitive acts that were due to be performed April 1 and later. HTC developers with a 24- or 60-month measuring period were given an extension to qualify for a one-year credit under transition rules, while the four-year continuity safe harbor for the renewable energy investment tax credit and production tax credit had an extra year added for properties that began construction in 2016 or 2017.

IRS Guidance Still Needed

The IRS was busy publishing COVID-19 relief during 2020 and early 2021, yet there is need for more. For example, an extension for time-sensitive NMTC acts due to be performed from April 1, 2020, through Dec. 31, 2020. The length and depth of the COVID-19 pandemic and related recession will determine the length and type of additional extensions needed.

But additional extensions aren’t all that’s needed.

OZ stakeholders, including the Opportunity Zones Working Group, have asked for additional IRS guidance for OZ businesses to confirm they are allowed to rework or dramatically alter their plans due to COVID-19. Specifically, the IRS should clearly provide that businesses don’t fail the working capital safe harbor requirement (to use working capital assets in a manner substantially consistent with their written schedule and plan) if the ability to carry out that plan was affected by COVID-19.

NMTC stakeholders have asked the IRS for further guidance, due to difficulties from COVID-19, to suspend the application of Treasury regulations concerning modifications to qualified low-income community investment loans in 2020 and 2021.

More issues will likely arise during 2021 and stakeholders will depend on the IRS to continue to provide appropriate relief.

Actions to Consider in 2021

While waiting on more relief and clarifying guidance from the IRS, developers, investors, property owners, operators and others are facing opportunities and challenges that didn’t exist before COVID-19.

In facing these opportunities and challenges, here are some business matters to consider:

  • Market studies and updates are even more important during times of economic uncertainty. The need for such studies and updates is particularly critical for developments in areas that feature industries hit hardest by the COVID-19 economy–such as areas that rely on tourism. Asset managers should also consider updated reviews of their portfolios in the post-COVID-19 period.
  • HTC developers considering a change of development plans due to post-pandemic economic realities (reconsidering hotel or office development, for instance) should consult with experts on how their market has changed and to better understand the financing considerations of alternative development strategies.
  • Owners and developers should stay in touch with investors and closely monitor tax credit equity pricing. The interaction of the pandemic, election results, federal legislation and recession contribute to a dynamic tax credit market.
  • The IRS issued guidance relaxing some compliance standards for LIHTC and U.S. Department of Housing and Urban Development- (HUD)-supported properties, but remaining in compliance remains crucial. Wise property managers will check in with experts to ensure that their procedures meet current standards.
  • Reliance on IRS deadline relief often involves compliance with interim requirements. For instance, the extension of the OZ working capital safe harbor requires continued compliance, a requirement complicated by the number of OZ businesses that have employees working from home–raising the issue of where gross income is earned. Assistance from experts can help ensure compliance, as well as collection and retention of appropriate documentation of any departure in order to be eligible for the reasonable cause exception.
  • The availability of COVID-19-related federal rental assistance grants means property owners and managers should consider seeking professional assistance to document eligibility for and to access grant dollars.

Crucial Role in Recovery

The American economy faces a recovery period from the COVID-19 recession, but the challenge is greater in low-income communities–where a significant amount of affordable housing, community development, historic preservation and renewable energy investment is targeted and made. Those incentives can be used to help rebuild and improve those communities.

Congress has long seen community development tax incentives as a tool to assist in recovery. After hurricanes Katrina, Rita and Wilma in 2005, Congress approved additional amounts of LIHTCs, NMTCs and HTCs for affected areas to assist in the recovery. When the Great Recession hit in 2008, the Housing and Economic Recovery Act of 2008 included enhancements to the LIHTC and HTC. Early the next year, the American Recovery and Reinvestment Act created exchange programs for LIHTCs and renewable energy tax credits (RETCs).

COVID-19 pandemic relief legislation primarily focused on direct payments to taxpayers and assistance to businesses, but community development tax incentives will still play a key role in the long-term recovery.

Some benefit will come from provisions enacted during the pandemic. Since the pandemic started, legislation enacted a 4% LIHTC minimum rate, a five-year extension to the NMTC, a delay in the phase-down of the renewable energy investment tax credit and production tax credit and the extension of several other renewable energy provisions. Those will provide additional investment where it’s needed.

The year of COVID showed the importance of IRS guidance for community development incentives, as well as highlighting the ability of practitioners to adjust. As we emerge from the pandemic and its recession, more guidance and flexibility are needed to ensure those incentives maximize their ability assist in the recovery.