IRC §42, Low-Income Housing Credit - IRS tax forms

1 IRC 42, Low-Income Housing Credit Revision Date - August 11, 2015. Note: This document is not an official pronouncement of the law or position of The National Register of Historic Places the Service and cannot be used, cited, or relied upon as such. This guide is current through the publication date. 1. Table of Contents IRC 42, Low-Income Housing Credit - Part I Introduction and Pre-Contact Analysis .. 10. Chapter 1 - Introduction .. 10. 10. Overview of the IRC 42 Program .. 10. State Housing Agency Responsibilities .. 13. IRS Responsibilities: Chief Counsel .. 15. IRS Responsibilities: LIHC Compliance Unit .. 15. IRS Responsibilities: Audits .. 16. Summary .. 16. Chapter 2 - Pre-contact Analysis .. 18. Introduction .. 18. 18. form 8609, Low-Income Housing Credit Allocation and Certification .. 18. form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition.

2 22. form 8609-A, Annual Statement for Low-Income Housing Credit .. 23. Balance Sheet .. 24. Schedule K and Schedule K-1 .. 25. Ownership By Individuals .. 25. Prior and Subsequent Year Returns .. 25. Related Returns .. 26. Risk Analysis .. 26. Initial Information Document Request .. 27. Summary .. 30. Exhibit 2-1 IDR & Crosswalk to 30. Chapter 3 - Audit Techniques .. 34. Introduction .. 34. 34. Interviewing Taxpayers .. 34. Touring IRC 42 Projects .. 38. Evaluating Internal Controls .. 41. Third Party Contacts .. 42. Summary .. 43. 1. IRC 42, Low-Income Housing Credit - Part II Tax Issues at the Project Level .. 45. Chapter 4 - First Year Certification .. 45. Introduction .. 45. 45. Law .. 45. Completing the Certification During the Audit .. 48. Evaluating Taxpayer Compliance .. 49. Taxpayer's Arguments.

3 51. Failure to Complete Certification .. 52. Audit 53. Penalties .. 53. Administrative Requirement .. 53. Summary .. 53. Chapter 5 - Extended Use Agreement .. 54. Introduction .. 54. 54. Law .. 54. Audit 58. Audit Techniques .. 58. Disallowance of Credit .. 59. Summary .. 59. Chapter 6 - Nonprofit Set-Aside .. 61. 61. Law .. 61. Audit 62. Audit Techniques .. 62. Audit Adjustments .. 66. Related 67. Summary .. 68. Chapter 7 - No Longer Participating in the IRC 42 Program .. 69. Introduction .. 69. 69. Law .. 69. Audit 71. 2. Audit Techniques .. 71. Building Reinstated in the Program .. 72. Summary .. 72. IRC 42, Low-Income Housing Credit - Part III Eligible 74. Chapter 8 - Eligible Basis: Includable Costs .. 74. Introduction .. 74. 74. Defining Eligible Basis .. 74. Reconciling Eligible Basis & Identifying Large, Unusual, or Questionable Items.

4 79. Verifying Assets Included in Eligible Basis .. 81. Common Areas, Required Facilities, and Providing Services .. 86. Development 89. Partnership Costs .. 99. IRC 42 Credit Allocation Costs .. 99. Cost of Securing Financing .. 100. Computing Adjustments to Eligible Basis .. 101. Summary .. 102. Chapter 9 - Eligible Basis: Acquisition and Rehabilitation of Existing Buildings .. 104. Introduction .. 104. 104. Acquisition of Existing Buildings .. 104. Substantially Rehabilitated Buildings .. 107. Acquiring a Low-Income Building Before the End of the Compliance Period .. 108. Acquiring a Low-Income Building During the First Year of the Credit Period .. 109. Acquiring a Low-Income Building Before the Placed in Service Date .. 111. Summary .. 111. Chapter 10 - Eligible Basis: Analysis of Financial Resources.

5 113. Introduction .. 113. 113. Federal Grants .. 113. Low-Income Buildings Financed with Tax-Exempt Bonds .. 114. Below Market Federal Loans .. 114. Nonrecourse Financing and IRC 42(k) (1), At-Risk 115. Nonrecourse Financing from an Qualified Nonprofit Organization .. 117. 3. Right of First Refusal to Purchase .. 119. Qualified Contracts .. 120. Bona Fide Debt .. 121. "Not-For-Profit" Rules and Economic 122. IRC 45D, New Markets Tax Credit .. 123. Audit Techniques .. 125. Summary .. 125. Chapter 11 - Eligible Basis: Limitations and Adjustments .. 127. Introduction .. 127. 127. Disproportionate Standards .. 127. Federal Grants .. 128. IRC 47, Rehabilitation Credit .. 133. IRC 48, Energy Credit .. 134. Supportive Services for the Homeless .. 136. Low-Income Buildings Financed with Tax-Exempt Bonds .. 136.

6 Community Service Facilities .. 140. Low-Income Buildings in High Cost 142. Summary .. 143. IRC 42, Low-Income Housing Credit - Part IV Applicable Fraction .. 145. Chapter 12 - Applicable Fraction .. 145. Introduction .. 145. 145. Law .. 146. income -Qualified Households .. 147. Rent Restrictions .. 160. Suitability for Occupancy .. 167. Available Unit Rule .. 174. Vacant Unit 177. General Public Use & Transient Use .. 180. On-Going Business Activity .. 185. Computing the Applicable Fraction .. 186. Minimum Set-Aside .. 191. Deep Rent 195. 4. Summary .. 195. IRC 42, Low-Income Housing Credit - Part V Qualified Basis .. 197. Chapter 13 - Qualified Basis .. 197. Introduction .. 197. 197. Law .. 197. Increases to Qualified Basis .. 198. Decreases in Qualified Basis .. 199. Maximum Qualified Basis .. 199. Supportive Services for the Homeless.

7 200. Imputed Zero Qualified Basis .. 200. Imputed Qualified Basis in the Event of Casualty Loss in Disaster Area .. 200. Qualified Basis Subject to Recapture .. 201. Summary .. 201. IRC 42, Low-Income Housing Credit - Part VI Applicable 203. Chapter 14 - Applicable Percentage .. 203. Introduction .. 203. 203. Law .. 203. Federally Subsidized Buildings Placed in Service Before July 31, 2008 .. 206. Federally Subsidized Buildings Placed in Service After July 30, 2008 .. 207. Audit Issues and Techniques .. 208. Adjustments to the Applicable Percentage .. 208. Summary .. 208. Reference .. 209. IRC 42, Low-Income Housing Credit - Part VII Computing Adjustments .. 211. Chapter 15 - Computing Adjustments to the Allowable Annual Credit .. 211. Introduction .. 211. 211. Adjustments to Eligible Basis .. 212. Adjustments to the Applicable Fraction.

8 212. Qualified Basis .. 213. Disposition or Acquisition of a Low-Income Building During the Taxable Year .. 214. Applicable Percentage .. 214. 5. Allowable Credit Before Adjustments .. 215. Adjustments to the Allowable Credit for Increases in Qualified Basis .. 215. Federal Grants Received after the End of the First Year of the Credit Period .. 217. Summary .. 220. Chapter 16 - Credit Recapture .. 222. Introduction .. 222. 222. Law .. 222. Special Rules .. 224. Noncompliance with IRC 42(h) (5), Nonprofit 228. Noncompliance with IRC 42(h) (6), Extended Use Agreement .. 228. Certain Partnerships Treated as the Taxpayer .. 229. Disposition Other than by Foreclosure or Transaction in Lieu of Foreclosure .. 230. Disposition by Foreclosure or Transaction in Lieu of Foreclosure .. 231. Taxpayer Acquires Building During the 15-Year Compliance Period.

9 233. Taxpayer Claimed Credit in Excess of Amount Allocated .. 233. Taxpayer Continues to Claim Credit After the End of the Credit Period .. 234. Summary .. 235. Chapter 17 - Examples .. 237. Introduction .. 237. 237. First Year of the Credit Period and Additions to Qualified Basis .. 237. Partial Disallowance of Credit During the 10-Year Credit Period .. 240. Recapture After the End of the 10-Year Credit Period .. 243. Disallowance of Credit in Multi-Year 244. Accounting for Prior Recapture Events .. 246. Failure to Meet the Minimum Set-Aside Requirement: One Building Project .. 247. Failure to Meet the Minimum Set-Aside Requirement: Multi-Building Projects .. 248. Summary .. 250. Chapter 18 - Report Writing for Partnership Audits .. 252. Introduction .. 252. 252. Audit 252. form 886-A, Explanation of Items.

10 254. 6. form 886-S, Partners' Shares of income , Deductions and Credits .. 254. Summary .. 254. IRC 42, Low-Income Housing Credit - Part VIII Other Topics .. 256. Chapter 19 - Auditing Partners .. 256. Introduction .. 256. 256. Claiming the IRC 42 Credit .. 256. Required Filing 257. IRC 6222, Consistent Treatment of Partnership Items .. 258. IRC 38(d), Ordering 259. Law .. 259. IRC 39, Carryback and Carryforward of Unused 259. IRC 469, Passive Activity Limitations .. 260. IRC 55, Alternative Minimum Tax .. 262. Flow-Through Adjustments from Partnership Audits: Current Year Adjustments .. 263. Flow-Through Adjustments from Partnership Audits: The Recapture Amount .. 264. Disposition of Interest in Partnership Owning IRC 42 268. Summary .. 270. Chapter 20 - Examination of income .. 272. Introduction .. 272.