IRS Issues Guidance on LIHTC Fixed 4% Rate
The Consolidated Appropriations Act, enacted in late 2020, amended Internal Revenue Code (IRC) Section 42(b) and established a minimum 4 percent credit rate for qualifying LIHTC projects. To qualify for the 4 percent minimum credit rate, a building must be placed in service after Dec. 31, 2020, and have received an issuance of tax-exempt bonds or an allocation of credits after Dec. 31, 2020. To clear up questions regarding its application to existing projects, the IRS recently issued Revenue Ruling 2021-20 and Revenue Procedure 2021-43.
The IRS noted that the 4 percent floor was designed in a way to avoid potential windfalls for LIHTC projects that had already been structured and had sufficient funding (and credits) before the implementation of the 4 percent minimum. The guidance addressed three common potential scenarios:
- Situation 1 is a project financed with tax-exempt bonds issued in 2020 and drawn down, at least in part, after Dec. 31, 2020.
- Situation 2 is a building financed with both a 2020 bond issuance and a separate, additional 2021 (or later) bond issuance.
- Situation 3 is a project that received an allocation of tax credits in 2020 and an additional allocation after Dec. 31, 2020.
Situation 1. The IRS makes clear that in the case of draw-down bonds, for the 4 percent minimum, the bonds are treated as a single issue with a date of issuance as of the first date that aggregate draws exceed the lesser of $50,000 or 5 percent of the issue price. Therefore, any project that received a 2020 draw-down bond issuance and drew at least $50,000 or 5 percent of the total issuance before Dec. 31, 2020, wouldn’t be eligible to use the 4 percent floor. Projects placed in service after 2020 that received a draw-down bond issued before Dec. 31, 2020, but didn’t draw the minimum amount in 2020 would be eligible for the 4 percent minimum credit rate.
Situation 2. The IRS considers a building financed in part with tax-exempt bonds issued before Dec. 31, 2020, and, in part, with a separate, additional issuance of tax-exempt bond proceeds issued after Dec. 31, 2020: If a project receives a subsequent bond issuance after Dec. 31, 2020, that’s deemed de minimis (less than 10 percent of aggregate tax-exempt bond issuances), it wouldn’t qualify for the 4 percent minimum credit rate. If, however, the subsequent (post-2020) issuance is equal to or greater than 10 percent of the total tax-exempt bond issuances, the project is able to utilize the 4 percent floor.
Situation 3. Here the IRS focuses on the allocation of tax credits rather than the issuance of tax-exempt bonds. The question is whether the 4 percent floor may be used for the acquisition portion of a 9 percent credit project that received its allocation in 2020. The IRS uses the same definition of de minimis for credit allocations as it does for bond issuances (10 percent of the aggregate credit allocation). Similar to Situation 2, if the building is placed in service after Dec. 31, 2020, and the additional tax credit allocation is 10 percent or more of the total allocation, the building qualifies for the 4 percent floor.