IRS Brings Back Temporary COVID-19 Compliance Relief
On Jan. 11, the IRS issued guidance extending LIHTC program deadlines and providing other compliance accommodations due to the COVID-19 pandemic [IRS Notice 2022-05]. Since the last extension deadline lapsed, industry groups have asked the IRS to extend compliance deadlines for LIHTC sites. The groups pointed to surging COVID-19 cases nationally to justify another extension.
The pandemic continues to impact the supply of construction materials, timing of permitting and local approvals, and the availability of construction workers. It also continues to limit the ability of site managers to interact with residents for regular property operations and to restrict the ability of state housing agencies to complete development approvals and regular compliance monitoring functions. This latest guidance grants the extensions along with other additional relief.
The IRS initially provided deadline extensions and other accommodations in July 2020 with IRS Notice 2020-53. And many of those extensions had expired before the IRS issued further extensions in January 2021 [IRS Notice 2021-12], many of which had since expired again on Sept. 30, 2021. We’ll go over the relief announced by the IRS, which includes extended compliance deadlines and temporary waivers and alterations to compliance inspection requirements.
2022 Year-End Deadlines
According to the guidance, the 10 percent test, 12-month transition period to meet set-asides for qualified residential rental projects, and the correction period (though the state agency may require a shorter extension) deadlines are extended to the end of 2022, at the latest.
10 percent test for carryover allocations. The 10 percent test requirement is found in Internal Revenue Code (IRC) Section 42(h)(1)(E) and (F). A site that receives a credit allocation must be “placed in service” (completed and occupied) in the year that the allocation is received.
But it’s commonplace for state agencies to issue “carryover allocations,” which extend the required placed-in-service date to the end of the second calendar year after the allocation was issued. To qualify for the carryover allocation, a site must incur at least 10 percent of its anticipated costs within the calendar year in which the allocation was received or six months after the date of the carryover.
If the original deadline for an owner of a building with a carryover allocation to meet the 10 percent test is on or after April 1, 2020, and on or before Dec. 31, 2020, the deadline is extended to the original deadline plus two years. If the original deadline is on or after Jan. 1, 2021, and before Dec. 31, 2022, the deadline is extended to Dec. 31, 2022.
12-month transition period to meet set-asides. The guidance allows a 12-month transition period for tax-exempt bond-financed projects to meet the set-aside for qualification as a residential rental project in Section 5.02 of IRS Revenue Procedure 2004-39. Transition periods ending on or after April 1, 2020, and before Dec. 31, 2022, are extended until Dec. 31, 2022.
Noncompliance correction periods. The guidance allows for an extension of up to 12 months to correct a finding of noncompliance. However, this is given at the discretion of the state housing agency. Original correction periods ending on or after April 1, 2020, and before Dec. 31, 2021, are extended by 12 months, but not beyond Dec. 31, 2022. And original correction periods ending at any point in 2022 are extended to Dec. 31, 2022. But the state agency may require a shorter extension or provide no extension at all.
Reasonable restoration period after casualty loss. If any of your tax credit units are suddenly or unexpectedly destroyed by casualty loss, you must restore or replace them within a reasonable period of time or the IRS will recapture tax credits on those units. The latest guidance treats casualty loss, regardless of whether or not the loss occurred due to a major disaster, the same way.
If a low-income building suffers a casualty loss for any reason causing qualified basis to be reduced, and the original deadline to restore the loss by reconstruction or replacement ends on or after April 1, 2020, the new reconstruction or replacement deadline is the sooner of 18 months from the original deadline or Dec. 31, 2022. State housing agencies may require a shorter extension or no extension at all.
2023 Year-End Deadlines
The following are the compliance deadlines extended to the end of 2023, at the latest:
Placed-in-service deadline. The placed-in-service date generally marks the beginning of the credit period. It’s defined as the date the property is ready for occupancy. Normally, the deadline for owners to place buildings in service is Dec. 31 of the second year after the carryover allocation date.
According to the new guidance:
- If the original deadline for a building to be placed in service is the close of calendar year 2020, the new deadline is Dec. 31, 2022.
- If the original placed-in-service deadline is the close of calendar year 2021 and the original deadline for the 10 percent test was before April 1, 2020, the new placed-in-service deadline is Dec. 31, 2022.
- If the original placed-in-service deadline is the close of calendar year 2021 and the original deadline for the 10 percent test was on or after April 1, 2020, and on or before Dec. 31, 2020, then the new placed-in service deadline is Dec. 31, 2023.
- If the original placed-in-service deadline is the close of calendar year 2022 (and thus the original deadline for the 10 percent test was in 2021), then the new placed-in-service deadline is Dec. 31, 2023.
24-month minimum rehab expenditure period. An LIHTC is allowable for costs associated with the substantial rehabilitation of a building. There are minimum expenditures to qualify, and rehabilitation expenditures incurred during any 24-month period must meet certain expenditure value criteria.
The notice extends the 24-month minimum rehabilitation expenditure period:
- If the original deadline for the 24-month minimum rehabilitation expenditure period for a building originally is on or after April 1, 2020, and is on or before Dec. 31, 2021, then that deadline is extended to the original date plus 18 months.
- If the original deadline for this requirement is on or after Jan. 1, 2022, and on or before June 30, 2022, then that deadline is extended to June 30, 2023.
- If the original deadline for this requirement is on or after July 1, 2022, and on or before Dec. 31, 2022, then that deadline is extended to the original date plus 12 months.
- If the original deadline for this requirement is on or after Jan. 1, 2023, and on or before Dec. 30, 2023, then that deadline is extended to Dec. 31, 2023.
Two-year rehab expenditure period for bonds. Original rehabilitation periods ending on or after April 1, 2020, and before Dec. 31, 2023, are extended to the earlier of 18 months from the original due date or Dec. 31, 2023.
Other Regulatory Relief
Along with the deadline extensions, the guidance includes a number of temporary compliance waivers and alterations to inspection requirements.
Common areas and amenities. The guidance extends the ability for temporary full or partial unavailability or closure of an amenity or common area in a low-income building or project without a reduction in eligible basis from April 1, 2020, to Dec. 31, 2022, in response to the COVID-19 pandemic and not because of other noncompliance. State agencies may deny any application of this waiver or limit the waiver to partial closure or to limited or conditional access to an amenity or common area. For example, a housing finance agency may apply the waiver for an amenity or common area that’s limited to persons wearing masks or to persons fully vaccinated against COVID-19.
Physical inspections. Physical inspections are not required until 2023 at the latest, if deemed necessary by the state agency. The guidance provides for a waiver of required compliance-monitoring physical inspections otherwise scheduled from April 1, 2020, until June 30, 2022.
State housing agencies, in consultation with public health experts, may extend this waiver as needed, and may apply such extension statewide, to specific areas of the state, or on a project-by-project basis depending on varying rates of transmission. However, such an extension of the waiver may not go beyond Dec. 31, 2022.
Agencies must resume physical inspections upon the expiration of the waiver, and are not required to make up physical inspections missed during the waiver period. And between April 1, 2020, and Dec. 31, 2022, agencies may consider a period of up to 30 days as reasonable notice to owners before performing a physical inspection. Beginning Jan. 1, 2023, the 15-day reasonable notice period resumes.
Tenant file reviews. These file reviews must still be completed. But the notice period has been increased. State housing agencies must give 30 days’ notice for tenant file reviews through the end of 2022 instead of the standard 15-day notice. The guidance provides for a waiver of required compliance-monitoring tenant file reviews otherwise scheduled from April 1, 2020, until Dec. 31, 2021. State housing agencies must resume these compliance requirements by Jan. 1, 2022, and they’re required to make up tenant file reviews missed during the waiver period. Beginning Jan. 1, 2023, the 15-day reasonable notice period resumes.
First-year occupancy obligations. The LIHTC program requires owners to meet certain occupancy requirements in the first year of the site’s compliance period. If all of the LIHTC units aren’t leased by the close of the first year of the LIHTC period, an owner must choose to either defer the first year of the credit period or take two-thirds LIHTCs on the units leased up in the following years.
The guidance says that if the close of the first year of the credit period with respect to a building is on or after April 1, 2020, and on or before Dec. 31, 2022, then the qualified basis for the building for the first year of the credit period is calculated by taking into account any increase in the number of low-income units by the close of the six-month period following the close of that first year.
Qualified allocation plan hearings. The notice formally allows housing credit agencies to conduct qualified allocation plan (QAP) public hearings under the same rules allowed for private activity bond hearings. QAP hearings can take place by phone again to satisfy public approval requirements. The guidance doesn’t provide a specific end date to this provision, but instead notes that Section 42(m)(1)(A) aligns LIHTC QAP rules with those for public hearings for tax-exempt bonds under Section 147(f). IRS Revenue Procedure 2021-39 allows for telephonic hearings for public approval requirements under Section 147(f) until March 31, 2022, so until that date telephonic hearings for QAPs are also allowed. If the IRS extend this allowance for tax-exempt bonds, this would also allow an extension of the allowance for LIHTC QAPs.
Temporary emergency housing. The IRS notice continues to allow property owners to provide temporary emergency housing to medical personnel and other essential workers as if they were displaced individuals. Medical personnel and other essential workers, as defined by state or local governments, may be treated as displaced individuals under Revenue Procedure 2014-49 and 2014-50 from April 1, 2020, until Dec. 31, 2022.