Administration Budget Contains Tax Credit Proposals

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The Obama Administration’s Fiscal Year 2014 budget proposes tax law changes relating to federal low-income housing, new markets, and energy tax credits. One is to make the new markets tax credit permanent.

Proposed legislative changes to the low-income housing tax credit (LIHTC) program include:

  • Permitting states to convert up to 7% of their annual private-activity bond volume cap authority into additional housing tax credit authority;
  • Changing the formula for computing the monthly credit percentages for 70% present value (“9%”) and 30% present value (“4%”) housing credits allocated after 2013. The change would raise the discount rate used to fix the monthly percentages to equal the average of the mid-term and long-term applicable federal rates for the relevant month, plus 200 basis points. The current method for computing the monthly credit percentage for the 4% credit for tax-exempt bond-financed projects wouldn’t change;
  • Allowing greater income mixing in LIHTC projects by adding an optional third set-aside election. Under this, at least 40% of a project’s units would have to be rent-restricted. Some of these units could have tenant income limits as high as 80% of the area median income (AMI), while others have income limits below 60% of AMI, provided that the average of the income limits for all the rent-restricted units doesn’t exceed 60% of AMI. Income limits below 20% of AMI would be treated as being at 20%. A special rule would apply to rehabilitation projects containing units receiving ongoing subsidies (e.g., rent, operating, interest) administered by the U.S. Departments of Housing and Urban Development (HUD) or Agriculture. Under this, a resident who met the LIHTC income limit at move-in but whose income has since risen but is not above 80% of AMI could stay on as a resident without causing a loss of housing credits for the unit;
  • Requiring state housing agencies to add the preservation of federally assisted affordable housing as an 11th selection criterion in their qualified allocation plans; and,
  • Allowing real estate investment trusts that invest in housing credits to designate some of the dividends they pay their shareholders as tax-exempt.

Other Proposals

The Administration’s budget also proposes:

  • Making the new markets tax credit program permanent, boosting the annual amount of NMTC allocation authority to $5 billion, and permitting certain NMTC investments to offset federal alternative minimum tax liability;
  • Making the renewable energy production tax credit permanent and refundable;
  • A new allocated Manufacturing Communities tax credit to support qualified investments in communities hit by military base closures or mass layoffs;
  • Increasing and making permanent the Section 179D tax deduction for commercial building energy-efficiency improvements, plus a new deduction for commercial buildings 10 years or older that undergo a qualified retrofit;
  • A new Provide America Fast Forward Bonds program. States and localities could issue these subsidized taxable bonds to finance governmental capital projects. The bonds could also be used for programs and activities eligible for private activity bond financing;
  • Increasing from 25% to 35% the cap on the net proceeds from a private activity bond issue that may be spent on land acquisition costs;
  • Simplifying tax-exempt bond arbitrage investment restrictions;
  • Taxing “carried interest” as ordinary income; and,
  • Restricting tax deductions for contributions of historic preservation conservation easements (e.g., historic building façade easements).

(Details: http://tinyurl.com/bv4y7oy)