Revenue Ruling 2021-20 and Revenue Procedure 2021-43: Low Income Housing Tax Credit 4% Floor

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Act”) was signed into law on December 27, 2020. As part of the Act, the Internal Revenue Service (“IRS”) created a 4% floor on tax-exempt bonds issued after December 31, 2020 to finance new or existing buildings. The floor also applies to non tax-exempt financed acquisitions and rehabs with credit allocations after 2020.

On December 1, 2021, the IRS issued Revenue Ruling 2021-20 which highlights three situations relating to the minimum 4% LIHTC floor for draw-down bonds issued prior to 2021. In addition, Revenue Procedure 2021-43 was issued to clarify situations 2 and 3 of the ruling.

The IRS determined that the 4% floor applies to all three situations described in the ruling regarding the requirement that a building be placed in service after 2020. The ruling deals with whether the post-2020 events in each situation meet the provisions, which require a post-2020 issuance of a tax-exempt obligation or a post-2020 allocation of housing credit dollar amount.

Prior to this ruling, it was accepted that the issue date of tax-exempt bonds was the draw-down date. In this revenue ruling, the language has been interpreted such that the intent of the Act refers to the issue date as being the date on which the obligation originates. This interpretation by the IRS is a reversal of their prior treatment and intends to prevent a credit windfall in situations where the tax credit transaction structure was substantially completed prior to enactment.

It was noted in the ruling that when the 4% floor applies to a building, it applies to any 30% present-value applicable percentage used to compute low-income housing tax credits for the building. It does not matter whether an election had been made to use a pre-placed-in-service month for determining the applicable percentage.

In this situation, the IRS ruled that the maximum loan funding occurred prior to 2021 and the transaction was structured prior to the enactment of the 4% floor. The application of the floor would cause a credit windfall that would not have been taken into account when the transaction was structured. Therefore, the 4% floor could not be used and credits would be calculated using the credit percentage as originally projected.

In accordance with this ruling, an exempt facility bond issued after December 31, 2020 that finances a building is not deminimis if, as of the latest issue date of any such issue, the aggregate amount of the post-2020 obligations is at least 10 percent of the total amount of all tax-exempt obligations that finance the building. This scenario would be consistent with the intent for the application of the 4% floor. Conversely, if the issue were considered deminimis, the 4% floor would not apply.

In accordance with the ruling, an allocation of housing credits to a building made after December 31, 2020 is not deminimis if the allocation is at least 10 percent of the total allocations to the building that have been made on or before the date of the allocation in question.

In this instance, there is a deminimis allocation of housing credit dollar amount after 2020. The acquisition of a building was completed after 2020, and the building was placed in service after 2020. The transaction would have been structured in 2020, and at that time the 4% floor was not available. Although the credit windfall effect with an allocation is less than that of a building financed with exempt facility bonds, the credits in this case are limited to those allocated by a housing credit agency, while projects financed by tax-exempt obligations are “as of right” and limited by qualified basis. Nevertheless, the ruling states that this provision should be interpreted consistently. Therefore, deminimis amounts of bonds should be treated in the same fashion as deminimis allocations. Consequently, the 4% floor does not apply to the building.

Author: Stu Koch, CPA | [email protected]