IRS Grants Relief from Timing Requirements
And considers issuing COVID-19 compliance guidance.
In late March, the National Council of State Housing Agencies (NCSHA) sent a letter to the IRS and the Treasury Department asking them to take immediate action to provide deadline extensions and other necessary accommodations for the LIHTC program due to the severe disruptions the COVID-19 pandemic is having on construction activities and the ongoing operations of existing LIHTC sites.
According to NCSHA, the IRS told the organization that the 10 issues for which NCSHA requested specific guidance are under active consideration by the IRS while it awaits guidance from the Treasury Department about how to proceed (see "10 Accommodations NCSHA Asked of the IRS," below).
While the IRS is considering the issuance of specific COVID-19 guidance, it has already agreed to apply the relevant provisions of IRS Revenue Procedures 2014-49 and 2014-50 on an immediate basis. Revenue Procedure 2014-49 is for LIHTC, and Revenue Procedure 2014-50 applies to sites financed with tax-exempt private activity bonds (PAB). The guidance allows the Federal Emergency Management Agency (FEMA) to provide certain regulatory relief to LIHTC sites and private activity bond transactions when the president declares a “Major Disaster” under the Stafford Act.
Major disaster declarations are intended for only the most severe circumstances where the most help is needed to get the community as close as possible to a pre-disaster state. As of April 8, 2020, the FEMA website listed 46 states as having requested presidential declarations of major disaster for their respective jurisdictions that would trigger assistance under Section 401’s Major Disaster declaration provision.
The revenue procedures were primarily drafted with natural disasters like hurricanes, earthquakes, floods, and large fires in mind, not a global pandemic. But the motivations for implementing deadline extensions are similar to what may be needed during a major weather event. For example, mandatory stoppages in construction activity, suspended site inspections, and broken supply chains necessitate the need for relief from timing requirements.
Specific Timing Requirements
Revenue Procedure 2014-49 provides relief for carryover allocation and placed-in-service requirements. 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.
10 percent deadline extension. If an LIHTC site owner has a carryover allocation for a building located in a major disaster area and the incident period for the major disaster began before the 10 percent deadline in IRC Section 42(h)(1)(E), the allocating agency may grant the owner an extension for meeting the 10 percent requirement. If such an extension is granted, the 10 percent requirement will be deemed satisfied if the site owner incurs more than 10 percent of the reasonably expected basis no later than the expiration of that extension.
Placed-in-service requirement extension. If the incident period for a major disaster occurred on or after the date of the carryover allocation, the state housing agency may grant an extension to the two-year placed-in-service period. The IRS will treat the LIHTC site owner as having satisfied the placed-in-service requirement if the owner places the building in service no later than the expiration of that extension.
Depending on the extent of damage in a major disaster area, a state housing agency may make this determination on an individual project basis or determine that all owners or a group of owners in the major disaster area warrant the above relief.
Recapture relief. A recapture, or taking back, of LIHTCs occurs when a project violates requirements of the program. Typical recapture occurs when the project fails to meet the minimum set-aside requirements by the end of each taxable year. This can occur if the project or building fails to meet the requirements in the first, or subsequent, tax credit periods.
Revenue Procedure 2014-49 provides guidance regarding tax credit recapture relief. Under Section 42(j)(4)(E), if a building’s qualified basis is reduced by reason of a casualty loss, it’s not subject to recapture of credits to the extent the loss is restored by reconstruction or replacement within a reasonable restoration period. Casualty loss is defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Property damage isn’t considered a casualty loss if the damage occurred during normal use, the owner willfully caused the damage or was willfully negligent, or the damage was progressive deterioration such as damage caused by termites.
Qualified basis is the money spent on the construction of a building that benefits low-income residents. But if the basis is reduced because of a major disaster in a declared major disaster area, there’s no recapture of credits as well as no loss of credits if the loss is restored by reconstruction or replacement within a reasonable restoration period. The allocating agency will determine the reasonable restoration period in the case of a major disaster that causes a reduction in qualified basis. Under Revenue Procedure 2014-49, the reasonable restoration period must not extend beyond the end of the 25th month following the close of the month of the major disaster incident period declaration. The credit amount allowable during the reasonable restoration period is measured using the building’s qualified basis at the end of the taxable year immediately preceding the first day of the incident period for the major disaster.
In its request to the IRS for additional COVID-19 guidance, NCSHA specifically requested the IRS provide a 12-month extension to the 25-month rehabilitation period currently allowed under IRS Revenue Procedures 2014-49 and 2014-50 to properties that suffered a casualty loss due to a presidentially declared major disaster in the 25-month period prior to the onset of COVID-19. In addition, NCSHA requested a 12-month extension of the year-end deadline for property restoration for any property that suffers a casualty loss not associated with a major disaster during 2020 (until Dec. 31, 2021).
10 Accommodations NCSHA Asked of the IRS
- Provide a 12-month extension of the 10 percent test deadline for carryover allocations as required by IRC Section 42(h)(1)(E)(ii) and IRS Regulation 1.42-6. Currently, at least 10 percent of the anticipated basis of a development must be expended within one year of the LIHTC allocation.
- Provide a 12-month extension of the 24-month minimum rehabilitation expenditure deadline as required by IRC Section 42(e)(3) and IRC Section 42(e)(4). These are currently required to be placed in service within 24 months.
- Provide a 12-month extension of the placed-in-service deadline as required in IRC Section 42(h)(1)(E)(i). Buildings must currently be placed in service by the end of the second year after the calendar year of the LIHTC allocation.
- Provide at minimum a 12-month extension of the 25-month rehabilitation period currently allowed under IRS Revenue Procedures 2014-49 and 2014-50 to properties that suffered a casualty loss due to a presidentially declared major disaster in the 25-month period prior to the onset of COVID-19. State Housing Credit agencies should be allowed to set restrictions within this period.
- Provide a 12-month extension of the year-end deadline for property restoration for any property that suffers a casualty loss not associated with a major disaster during 2020 (until Dec. 31, 2021). State Housing Credit agencies should be allowed to set restrictions within this period.
- Provide a 12-month moratorium on both physical inspections and tenant file reviews as required by IRS Regulation 1.42-5. State Housing Credit agencies should continue to monitor emergency work orders during this time, and should be allowed to continue or resume inspections depending on their assessment of the situation in their state and their ability to do so, but there should be no penalty for states or owners if inspections are not completed during this time.
- Provide a 12-month moratorium on tenant income recertification requirements. State Housing Credit agencies should be allowed to continue or resume requiring property managers to conduct recertifications depending on their assessment of the situation in their state and their ability to do so.
- Provide a 12-month extension for all open noncompliance corrective action periods. State Housing Credit agencies should be allowed to reinstate deadlines depending on their assessment of the situation in their state and their ability to do so.
- Suspend the yet-to-be implemented IRS Regulation 1.42-5 that will increase the number of required compliance monitoring physical inspections even further than required under current regulations and exacerbate the inspection backlog.
- Provide guidance clarifying that the temporary closure of property amenities and common space facilities during the duration of the crisis (with the exception of laundry facilities) won’t negatively impact a property’s eligible basis and result in loss of credits.