Transcription of IRC §42, Low-Income Housing Credit - MHIC
1 IRC 42, Low-Income Housing Credit The scope of this guide is limited to guidelines for IRS examiners conducting audits of taxpayers owning IRC 42, Low-Income Housing projects. Audit Technique Guide This material was designed specifically for training purposes only. Under no circumstances should the contents be used or cited as authority for setting or sustaining a technical position. Training 3123-006. (Rev. 09-2014). TPDS No. 89028M. This page intentionally left blanks PREFACE. This audit technique guide was prepared to assist IRS examiners audit taxpayers, usually partnerships, owning IRC 42 Low-Income Housing projects. The guide is organized in the order an examiner might address issues during an audit, working from high- level issues to issues requiring more detailed analysis, and chronologically from the Precontact Analysis through Report Writing.
2 Two related topics, auditing partners and completing the Examination of income , are also addressed. Part I presents an overview of the IRC 42 Credit , instructions for completing the precontact analysis, and a discussions of how audit techniques are applied for IRC 42 issues. Appendix A is a glossary of terms specific to IRC 42. Part II presents four high-level issues that can usually be addressed at the project level. Part III focuses on auditing Eligible Basis, which are the costs of depreciable residential rental property upon which the Credit amount is computed. Parts IV, V and VI address the remaining three factors needed to compute the allowable Credit ; , the Applicable Fraction, Qualified Basis, and Qualified Percentage. Part VII provides guidelines for computing adjustments to the allowable Credit and computing the Credit recapture amount under IRC 42(j).
3 Examples of computations for common fact patterns are included in Chapter 17. Chapter 18 presents unique report writing requirements for partnership audits. Part VIII provides guidelines for auditing taxpayers who are partners in partnerships owning IRC 42. projects. This is necessary because some IRC 42 rules are applied at the partner level. Further, Chapter 19 provides guidelines for applying the Credit ordering rules and tax benefit rules when making adjustment to the Credit as a flow-through adjustment resulting from a partnership audit. The guide is extensively referenced. If the entire citation is not included in the text, refer to Appendix B. This page intentionally left blank. Table of Contents Audit Technique Guide IRC 42, Low-Income Housing Credit Part I Introduction and Pre-Contact Analysis Chapter 1 Introduction Chapter 2 Precontact Analysis Exhibit 2-1, IDR & Crosswalk to Issues Chapter 3 Audit Techniques Part II Tax Issues at the Project Level Chapter 4 First-Year Certification Chapter 5 Extended Use Agreement Chapter 6 Nonprofit Set-Aside Chapter 7 No Longer Participating in the IRC 42 Program Part III Eligible Basis Chapter 8 Eligible Basis: Includable Costs Chapter 9 Eligible Basis: Acquisition and Rehabilitation of Existing Buildings Chapter 10 Eligible Basis: Analysis of Financial Resources Chapter 11 Eligible Basis.
4 Limitations and Adjustments Part IV Applicable Fraction Chapter 12 Applicable Fraction Part V Qualified Basis Chapter 13 Qualified Basis Part VI Applicable Percentage Chapter 14 Applicable Percentage Part VII Computing Adjustments Chapter 15 Computing Adjustments to the Allowable Annual Credit Chapter 16 Credit Recapture Chapter 17 Examples Chapter 18 Report Writing for Partnership Audits Part VIII Other Topics Chapter 19 Auditing Partners Chapter 20 Examination of income Part IX Appendix A Glossary of Terms B References C Treatment of Assets/Costs for IRC 42 Purposes D Treas. Reg. , Residential Rental Property E Recordation and Documentation Requirements F United State v. Boyle (Failure to File). G Corbin West LP v. Commissioner (Eligible Basis). H Bentley Court II LP v.
5 Commissioner ( Credit Recapture). I Carp and Zuckerman v. Commissioner (Substantiation/Performance of Services). J Court Case: Pioneer Housing , Inc. v. Commissioner (Nonprofit Participation). This page intentionally left blank. Chapter 1. Introduction Introduction The IRC 42 Low income Housing Credit Program was enacted by Congress as part of the Tax Reform Act of 1986 to encourage new construction and rehabilitation of existing buildings as Low-Income rental Housing for households with income at or below specified income levels. Congress recognized that a private sector developer may not receive enough rental income from a Low-Income Housing project to cover the costs of development and still provide a return to investors sufficient to attract the needed equity investment.
6 The IRC 42 program provides tax incentives for investors to make equity investments. In exchange for equity, investors receive tax credits and other tax benefits associated with ownership of the project to offset federal income taxes for a ten year period. These tax benefits, plus the possibility of cash proceeds from the eventual sale of the project, represent the investors' return on investment. Topics Overview of the IRC 42 Program State Housing Agency Responsibilities IRS Responsibilities: Chief Counsel IRS Responsibilities: LIHC Compliance Unit IRS Responsibilities: Audits Summary Overview of the IRC 42 Program The taxpayer agrees to provide Low-Income Housing for at least thirty years. 1. In exchange for the investment in Low-Income Housing , the taxpayer will receive tax credits for each of ten years, which is known as the Credit period.
7 2. To keep the Credit , the taxpayer must provide Low-Income Housing for fifteen years, which is known as the compliance period. Failure to maintain the Housing in compliance with IRC 42 requirements for the entire compliance period can result in the recapture of a portion of the Credit allowable in prior years. 3. After IRS jurisdiction ends, the state agency has sole jurisdiction and the taxpayer must continue to provide Low-Income Housing for at least another fifteen years. The extended use period is at least 30 years, beginning with the first year of the Credit period. All three time periods begin on the same day; , the first day of the tax year in which the building is placed in service, or if the taxpayer elects, the beginning of the following tax year. Types of The Credit supports a variety of Housing opportunities.
8 The taxpayer can build new Housing Housing or rehabilitate existing buildings. The Housing can be apartments, single- family Housing , single-occupancy rooms, or even transitional Housing for the homeless. A building may be mixed Low-Income and market-rate rental units, and a portion of the building may be for commercial use. Generally, the Housing must be 1-1. Revised September 2014. used on a nontransient basis; , an initial 6-month lease term. Also, the Housing must qualify as residential rental property; , no hotels, hospitals, or nursing homes, etc. Combining with Besides qualifying for the Low-Income Housing Credit under IRC 42, the taxpayer Other Tax may also qualify for the Rehabilitation Credit under IRC 47 and the Energy Credit Credits under IRC 48, but not the New Markets Credit under IRC 45D.
9 A building may also qualify for tax-exempt bond financing under IRC 146, in which case the taxpayer is also subject to the rules under IRC 142(d). The taxpayer may also use other federally-sourced loans and grants to finance and operate the building. Computation The amount of Credit the taxpayer can claim each year is determined as: of Allowable Annual Credit Eligible Basis x Applicable Fraction = Qualified Basis Qualified Basis x Applicable Percentage = Annual Credit Amount Eligible Basis The Eligible Basis is the total allowable cost associated with the depreciable residential rental If the building is located in a high cost area, the eligible basis may be increased to 130% of the actual costs. Applicable Fraction The Applicable Fraction is the portion of rental units that are qualified Low-Income units; determined as the lesser of square footage or number of units.
10 To qualify, the unit must be occupied (or last occupied) by an income -qualifying household and, if the household is comprised entirely of full-time students who otherwise qualify as Low-Income tenants, the unit is qualified only if an exception under IRC 42(i)(3)(D). is met. The Housing must be suitable for occupancy and free from health and safety hazards. The rent must also be restricted; , the rent cannot exceed 30% of the income limit applicable to the building location. Qualified Basis Qualified Basis is the product of the Eligible Basis and the Applicable Fraction. Applicable Percentage The amount of Credit , over the ten-year Credit period, is equal to the present value of either 70% or 30% of the qualified basis, depending on the characteristics of the Housing . The discount factor is known as the Applicable Percentage and is based on interest rates.