IRS Clarifies 4% Floor Ruling for LIHTC
AAFCPAs would like to make clients who engage in Affordable Housing projects aware of recent IRS Revenue Rulings 2021-20 and 2021-43, which aims to clarify the eligibility of Low-Income Housing Tax Credit (LIHTC) projects to qualify for the new 4% floor ruling. The IRS has published three situations listed below:
A project is financed with a 2020 issued exempt facility bond. The project will make multiple draws on the bond throughout the construction period. In 2020, the borrower drew an amount in excess of $50,000 or 5% of the issue price. In subsequent years the borrower drew down the remaining funds.
Question: Does the minimum 4% floor apply to the building which is financed in part with a draw-down exempt facility bond issue that was issued in 2020 and on which one or more draw-downs are taken after December 31, 2020?
Answer: The 4% floor in this case does not apply as the bonds were issued in 2020 and more than $50,000 or 5% of the issue price was drawn down before December 31, 2020. The IRS has ruled the financing is part of a single issue under IRS code 1.150-1(c)(4)(i) and the issue date is set once the $50,000 or the 5% has been met.
The facts are the same as in Situation 1, however a separate post-2020 issuance of a de minimus amount of exempt facility bonds was made. De minumus was clarified in IRS ruling 2021-43 as less than 10% of the total amount of bond obligations.
Question: Does the 4% floor apply with the post 2020 issuance?
Answer: No because less than 10% of total bond obligations was issued after December 31, 2020.
A project received a 2020 allocation of LIHTC and an additional de minimus allocation during 2021 or later but prior to being placed in service.
Question: Does the 4% floor apply for the additional allocation in 2021 as it pertains to acquisition credits?
Answer: No because it was only a de minimum allocation in comparison to the total allocation of LIHTC.
For Situations 2 and 3, in order to qualify for the 4% floor, more than the 10% de minimus threshold must be met.
As always, AAFCPAs will continue to monitor communications from the IRS and keep you informed as changes occur or become clarified.