On December 1, 2021, the Internal Revenue Service (IRS) issued guidance on the minimum 4% low-income housing tax credit (LIHTC) rate. Revenue Ruling (Rev Rul) 2021-20 clarifies when the 4% floor applies to projects receiving housing credit allocations or tax-exempt bonds. Revenue Procedure (Rev Proc) 2021-43 provides safe harbors for determining whether an exempt bond that is issued after December 31, 2020, or an allocation of a housing credit amount that is made after December 31, 2020, is more than de minimis for purposes of Rev Rul 2021-20.
Background
The Consolidated Appropriations Act, 2021 amended Internal Revenue Code Section 42 and established a minimum 4% LIHTC rate for certain buildings that are not eligible for the 9% housing credit. The 4% housing credit floor rate applies to:
- any building which receives an allocation of 4% housing credit after December 31, 2020, and
- any building which is financed with tax-exempt bonds that are issued after December 31, 2020.
Prior to the change in the law, the credit rate was based on the Applicable Federal Rate (AFR) that is adjusted monthly by the U.S. Treasury Department and typically, such rate was below 4%. With the enactment of the new law, a minimum floor rate of 4% will apply even when the AFR is below 4%.
Rev Rul 2021-20
The IRS ruling covers three situations in which buildings were financed with tax-exempt bonds or received LIHTC allocations.
In Situation 1, a building was financed with tax-exempt bonds issued in 2020 and the bonds were drawn down in 2020 and 2021. The IRS ruled that the 4% credit floor does not apply because the bonds were considered to be issued in 2020. In the IRS analysis, the bonds were considered issued in 2020 because under Treasury Regulation Sec. 1.150-1(c)(4)(i), it was determined that (1) bonds issued under a draw-down are treated as part of a single issue, and (2) the issue date is the first date on which the aggregate draws exceed the lesser of $50,000 or 5% of the issue price (which was the case in Situation 1).
In Situation 2, a building was financed in part with proceeds of an exempt bond issue that was issued in 2020 and in part with proceeds of a different exempt bond issue that is issued in a de minimis amount after December 31, 2020. The IRS ruled that the 4% credit floor does not apply because the bonds issued after 2020 were deemed to be de minimis (less than 10% of the aggregate tax-exempt bond issuances). The definition of de minimis is provided by the IRS in Rev Proc 2021-43.
In Situation 3, a building receives an allocation of housing credit dollars in 2020 for the acquisition of an existing building and a de minimis additional allocation after December 31, 2020. The IRS ruled that the 4% credit floor does not apply because the additional allocation after December 31, 2020 was deemed to be de minimis (less than 10% of the aggregate credit allocation). The IRS defines de minimis in Rev Proc 2021-43.
Rev Proc 2021-43
On December 1, 2021, the IRS issued this revenue procedure that provides safe harbors for determining whether an exempt bond issue that is issued after December 31, 2020, or an allocation of a housing credit dollar amount that is made after December 31, 2020, is more than de minimis for purposes of Rev Rul 2021-20.
An exempt bond issue that is issued after December 31, 2020, is not de minimis if the aggregate amount of the post-2020 obligations is at least 10% of the total amount of all exempt bond obligations that finance the project.
An allocation of housing credit dollar amounts to a building made after December 31, 2020 is not de minimisif the allocation is at least 10% of the total allocations to the building that have been made on or before the date of the allocation in question.
If you have any questions, please contact your trusted certified public accountants at info@lvhj.comregarding your tax situation.
