Who Allocates State Tax Credits?
• Tax credits are allocated by the State’s tax allocating agency, typically its housing department. Allocations to specific projects are made according to a statewide Qualified Allocation Plan (“QAP”). In some states, a certain amount of tax-allocating authority is delegated to other agencies.
• Procedures differ from one jurisdiction to another regarding both tax credit application procedures and the procedures for issuing the IRS forms 8609 (which are required for the partnership to begin taking the tax credits).
Project vs. Building-by-Building Allocation
• If the project consists of more than one building, tax credits may be allocated to the project as a whole (“project basis”) or on a building-by building basis (“building basis”). A project allocation has certain advantages, provided certain timing and rental criteria can be met. The tax credit process is easier to administer and a project allocation provides more flexibility when certifying costs.
• However, mixed-use projects with rents above the tax-credit program’s upper rent limitations usually can’t qualify for a project allocation. And projects with long construction periods may not want to use a project allocation, if the project’s costs cannot be incurred within the program’s 24-month cost accumulation period. These and other tax credit issues should be addressed with your syndicator, attorney and accountant during the project-structuring period.
• Once construction is completed, each building must be placed in service individually. That means each building must meet the placed-in-service requirements of the tax credit program. Project costs must be allocated to the building, and each building must meet threshold occupancy requirements. Most state tax credit allocating agencies now require the partnership’s CPA firm to certify to each building’s tax-credit eligible costs as well as to the project’s total costs.
• If there are problems in meeting per-building threshold tests, there may be ways to group two or more buildings together to structure around possible eligibility issues.
Sometimes the construction costs incurred for different buildings vary from those estimated at the time tax credits were allocated. If tax credits were allocated on a project basis, it may be possible to avoid the loss of tax credits by adjusting each building’s basis. That is not possible when tax credits are allocated on a building-by-building basis.
Just a few tips to consider.