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Yearend Tax Credit Reminders–Act Now

Published by Michael J. Novogradac on Thursday, September 1, 2016

Journal cover September 2016   Download PDF

As we head into the final quarter of the calendar year, affordable housing, community development, historic preservation and renewable energy investors, sponsors and developers have many issues to consider and deadlines to meet. Regardless of the issue, now is the time to revisit ways to maximize opportunities, minimize stress and beef up benefits before we turn the page to 2017.

In many ways this yearend is different. We aren’t dealing with many of the historical vagaries dependent on possible yearend tax credit extenders legislation. Last year’s end-of-session decisions to make the low-income housing tax credit (LIHTC) minimum 9 percent rate permanent, as well as to grant five-year extensions for the new markets tax credit (NMTC) and renewable energy investment tax credit (ITC) and production tax credit (PTC), provide a modicum of predictability. That said, there is still plenty of planning to address in the coming months.

General

Before yearend, partners should assess or reassess capital accounts for potential negative capital account issues, which could cause reallocation of tax credits and losses and other issues.  In all types of tax credit properties, the end of the year is a good time to assess or reassess exit strategies in order to be better prepared for the end of a compliance period. 

Investors, sponsors and developers in all types of tax credit partnerships should be especially sensitive to any changes in ownership that have occurred in their tax credit investment ownership structures. Partnerships need to file separate short-year tax returns for any changes in ownership that cause a technical termination. Be sure to work with your tax professionals so you can avoid late penalties and interest caused by a short-year tax-filing requirement. 

Bonus Depreciation

Bonus depreciation was extended last year through 2019, allowing a project to expense up to 50 percent of certain new assets with depreciable life of 20 years or less when it’s placed in service–primarily site improvements and personal property, including qualifying energy property.  Investors or developers who are considering bonus depreciation should analyze the pros and cons of this option–such as capital account impact, investor yield and equity pricing–before yearend.

It is possible to split the bonus depreciation election: for example, elect out of bonus depreciation on site improvements, but keep it on personal property.  For those undecided about taking bonus depreciation, these are good months to seek out professional help with a cost segregation study (to determine what’s eligible for bonus depreciation) and to have projections prepared to make informed decisions on bonus depreciation.  It would behoove investors and developers to consider bonus depreciation in their projections to determine credit pricing up front. The 50 percent bonus depreciation is set to phase out, reducing to 40 percent in 2018, and 30 percent in 2019.

A reminder: if you don’t want to claim bonus depreciation, you must affirmatively opt out, so don’t ignore it. 

Affordable Housing

Partnerships seeking to start the credit period for LIHTC buildings  in 2016  generally need to have a certificate of occupancy before Dec. 1 if they want to claim tax credits for a portion of the year. In addition, to avoid 15-year credits, each building should also, generally, be fully qualified–leased up to qualified tenants–before the close of the year. A third-party review of first-year tenant files is widely recommended, because they are an integral part of substantiating the amount of credits that can be claimed.

Another item to consider–and for which to consider professional help–is grouping buildings to maximize the credits. Handling Question 8B on IRS Form 8609 is crucial in the LIHTC world and worth the time and expense to get help.

If you’re working with a U.S. Department of Housing and Urban Development (HUD) Rental Assistance Demonstration (RAD) program property (or another acquisition-rehabilitation development), remember that tax credits can be claimed back to the later of Jan. 1 or the acquisition date to the extent the units are occupied by qualified tenants and the rehabilitation work is placed in service by the end of the year. Another HUD-related item worth your attention is the possibility that HUD will announce that designated development areas (DDA) or qualified census tract (QCT) designations could switch back to a calendar-year schedule.

Community Development

When the CDFI Fund makes its combined 2015-16 allocation award announcement of $7 billion this fall, many investors will be seeking to make investments before yearend, in order to claim tax credits in 2016.  NMTC allocatees will also face deadlines for issuing a minimum amount of qualified equity investments (QEIs) if they wish to apply in the 2017 round. As such, many community development entities (CDEs) are taking steps now to ensure their ability to make investments in developments as soon as possible after the allocations, and quite possibly before yearend. That makes contacting your accounting professionals now even more important to assure that CDE and investor-required financial projections are timely prepared and updated as needed.

There will also be new restrictions on the use of qualified low-income community investment (QLICI) proceeds in the 2015-1016 allocation. The NMTC Working Group is discussing best practices for CDEs to comply with the new restrictions. Earlier this year, the NMTC Working Group submitted comments to the CDFI Fund regarding the new restrictions, including making some specific recommendations. Keep in touch with your tax credit professionals to assure correct handling of QLICIs.

There will also be the release of the 2017 NMTC application, for which the CDFI Fund will seek public comments. Those in the NMTC community should prepare to make their voices heard–there are some significant changes expected.

Historic Preservation

Partnership agreements for many historic tax credit (HTC) projects currently being renovated provide incentives for developers to deliver 2016 credits.  These developers are motivated to see their projects placed in service by the end of the year.  

Projects with single-tier structures expecting to deliver 2016 credits should review their financial projections and reevaluate whether the investor will have sufficient basis as of the end of the year to claim the credit. If there’s a potential issue in this regard, it’s best to identify it early to allow sufficient time for the parties to deal with it before the end of the year. This should be done with your tax professional.

And did I mention Section 50(d)?  Developers and investors in pass-through HTC investments need to consider the proper application of the recent IRS guidance, regardless of whether the historic property has already been placed in service, is about to be placed in service, or will be placed in service next year.

Renewable Energy

Similar to the historic tax credit, many developers of renewable energy tax credit properties have financial incentives to deliver 2016 credits, these developers are similarly motivated to see their projects completed and placed in service by the end of the year.  

While the ITC and PTC were extended last year, some “orphan” technologies–including geothermal, biomass and fuel cell–weren’t a part of the legislation and expire at the end of the year. Efforts to tie their extension to other legislation have been so far unsuccessful, so those in the renewable energy tax credit world face two options: Get the developments placed in service by the end of the year and/or continue to push for the extension. As those in the RETC world know, sometimes the determination of a placed-in-service date is a gray area. With many transactions looking to beat the clock–particularly fuel cell properties–it’s a good idea to consult with your tax credit accountant to be sure all the criteria are met if the transaction is cutting it close to the yearend deadline.

Two other significant renewable tax benefits have a placed-in-service deadline of Dec. 31, barring an extension: The Section 45L credit for energy-efficient new homes in buildings of three or fewer stories and the Section 179D energy-efficient commercial and multifamily buildings deduction for buildings of four or more stories. 

And, of course, a reminder that PTC extension legislation comes into play here: Under the gradual phase-out of the PTC (and ITC for wind facilities that elect to take it in lieu of the PTC), the credit drops to 80 percent of its previous level after Dec. 31. That means that properties that fail to commence construction before the end of 2016 will lose at least 20 percent of the tax credit benefit. Solar properties taking the ITC don’t begin their gradual stepdown until 2020.

Conclusion

There are a lot of deadlines and decisions to be made in the final months of 2016. Be sure to stay aware of elections you must make, forms you must file and deadlines for placing properties in service or commencing construction.

The investment of a little time and money now can save you a lot of both in the future.

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