By Anjelica Smith
Low Income Housing 9% – MHFA HTC 2023 Round 1 Tax Credit Allocation Applications – 7/13/2023
City of Minneapolis Affordable Housing Trust Fund funding proposals are due by 4:00pm on 7/20/2023
Carryover Application: 11/1/2023
CPED/St. Paul PED
Carryover Application: 11/1/2023
Dakota County CDA
Carryover Application: 10/16/2023
Final CPA Certification: 10/2/2023
Washington County CDA
Carryover Application: 10/2/2023
Partnership Tax Return Due Date with Extension- 9/15/2023
Individual and C Corp Tax Return Due Date with Extension- 10/16/2023
If you have not submitted your 8609 package, please do so as soon as possible to ensure receipt of Form 8609 by the 9-15-23 tax return due date if claiming credits in 2022 tax year.
By Megan Brownell
The IRS released a notice of proposed rulemaking with additional guidance on low-income communities bonus credit program. The notice provides insight into how 10% and 20% bonus for the renewable energy investment tax credit (ITC) will be distributed to clean energy facilities qualifying for the 1.8 GW of Environmental Justice Solar and Wind Capacity Limitation each calendar year. The bonus applies to ITC facilities in low-income communities, Tribal lands, low-income economic benefit projects, and on properties that participate in federally covered affordable housing programs, such as those financed by low-income housing tax credit (LIHTC) equity.
The IRS released two notices of proposed regulations on June 21, 2023. The first is regarding the election under the Inflation Reduction Act of 2022 to treat the amount of certain tax credits as a payment of Federal income tax. The second is regarding the election under the Inflation Reduction Act of 2022 to transfer certain Federal income tax credits. For more information on both proposed regulations, see the article below written by Alex Cho.
By Megan Brownell
Included in the bill passed by the Minnesota legislators in May 2023 was the amendment to the State Historic Tax Credit. The amendment to the credit was retroactively effective beginning July 1, 2022 (previously expired June 30, 2022) and will expire after 2030. For the purposes of the credit, projects that have started rehabilitation work after June 30, 2022, and before July 1, 2023, that otherwise meet all other requirements, may be eligible for the credit if the application is received on or before August 30, 2023.
Also included in the bill was an update to the Class 4d property classification (now 4d(1) and 4d(2)) beginning with assessment year 2024. The updated 4d(1) classification is qualifying low-income rental housing certified to the assessor by the Housing Finance Agency. If only a portion of the units in the building qualify as low-income rental housing units, only the proportion of qualifying units to the total number of units in the building qualify for class 4d(1). The remaining portion of the building will be classified by the assessor based upon its use. Class 4d(1) also includes the same proportion of land as the qualifying low-income rental housing units are to the total units in the building. For all properties qualifying as class 4d(1), the market value determined by the assessor must be based on the normal approach to value using normal unrestricted rents.
Class 4d(1) property has a classification rate of 0.25 percent. Class 4d(2) property has a classification rate of 0.75 percent.
The owner of a property certified as class 4d(1) must use the property tax savings received from the 4d(1) classification for one or more of the following eligible uses: property maintenance, property security, improvements to the property, rent stabilization, or increases to the property’s replacement reserve account. To maintain the class 4d(1) classification, the property owner must annually reapply and certify to the Housing Finance Agency that the property tax savings were used for one or more eligible uses.
A property owner must receive approval by resolution of the governing body of the city or town where the property is located before submitting an initial application to the Housing Finance Agency, for property that has not, in whole or in part, been classified as class 4d(1) prior to assessment year 2024.
On June 21, 2023 Treasury and the IRS published Notices of proposed rulemaking regarding Elective Payment (REG-101607-23) and Transfer of Credits (REG-101610-23) in the Federal Register. They serve as additional guidance to Section 6417 and Section 6418 which were added to the Internal Revenue Code by the Inflation Reduction Act of 2022.
Elective Payment of Applicable Credits (Section 6417) – aka Direct pay
Section 6417 allows applicable entities to make an elective payment election with respect to 12 applicable clean energy credits. If an applicable entity makes an elective payment election, the applicable entity is treated as making a payment in the amount of the applicable credit to the IRS to pay its federal income tax liability (if any), which would result in the applicable entity receiving a refund from the IRS if the applicable entity does not have any or sufficient federal income tax liability to otherwise use the credit. Any applicable credit amount with respect to which the election in Section 6417 is made is treated as tax exempt income. If tax exempt amounts are used to finance the energy property, the sum of credits and tax exempt amounts cannot exceed the cost of the energy property.
Transfer of Certain Credits (Section 6418) – aka Transferability
Section 6418 allows a taxpayer who generates 11 applicable clean energy credits to elect to transfer (i.e., sell) all or a portion of credit to an unrelated party or parties. Cash must be paid for the transfer of credits. Cash paid and received for the transfer of credits is not included in transferors’ gross income and the transferee cannot deduct the cash paid. Entities eligible for elective payment (“applicable entities”) cannot sell credits under Section 6418.
Election is made on the annual tax return. Taxpayers need to provide the registration number of the property that generates the applicable credits when filing the annual tax return. Therefore, taxpayers should complete the pre-filing registration in sufficient time to have a valid registration number prior to filing the tax return by the due date (including extensions of time). More information about the pre-filing registration process is expected to be available in the fall of 2023.
Elective Payment and Transfer of Certain Credits elections can only be made on an original return filed not later than the due date (including extensions of time) for the original return for the taxable year for which the applicable credit is determined. No election is permitted to be made on an amended return or by filing an administrative adjustment request under section 6227 of the Code.
On June 1st, 2023, the IRS published a document containing proposed rules for the low-income communities’ bonus energy investment credit program. It is meant to provide additional clarification on parts of the Inflation Reduction Act signed into law on August 16, 2022.
The base credit available to Section 48 energy property is 6%. Projects with a maximum net output of less than 1 Megawatt or meet prevailing wage and apprenticeship requirements as determined by the Secretary of Labor, qualify for a multiplier of 5; providing you with a 30% tax credit.
Additionally, a 10 percent boost is available for qualified solar and wind projects located in low-income communities. A 20 percent boost is available for projects that are part of a low-income residential building project. The boost must be allocated by the Secretary of Labor and is limited to providing 1.8 gigawatts of direct current capacity per calendar year. This boost is likely to be competitive and only applies to the 2023 and 2024 calendar years.
A qualified solar and wind project is any facility that generates electricity solely from a wind facility, solar energy property, or small wind property; has a maximum net output of less than 5 megawatts ac; and is in a low-income community, located on Indian Land, part of a qualified low-income residential building project, or a qualified low-income economic benefit project.
Later this year the IRS and Treasury Department is expected to issue a comprehensive set of procedures and rules for applicants applying to the 2023 Capacity Limitation.
More specifics can be located within the full published document by the IRS, but a summary of what was proposed is as follows:
a. Definition of Facility– Multiple properties operating as part of a single project should be aggregated and treated as a single qualified solar and wind facility. A facility will be treated as part of a low-income residential building project if such facility is installed on a residential rental building that is already part of a covered housing program.
b. Energy Storage Technology Installed in Connection with Solar and Wind Facility– Energy storage technology would be “installed in connection with” other eligible property if they are part of a single facility, are connected through pieces of land and have a common interconnection point. The technology also must be charged by no less than 50 percent by the other eligible property. A safe harbor has been proposed that deems the technology be charged at least 50 percent by the facility if the power rating of the energy storage technology is less than twice the capacity rating of the connected facility.
c. Financial Benefits for Category 3 and Category 4 Allocations– For facilities to qualify as part of a low-income residential building project, and therefore qualify for the 20 percent boost, financial benefits of the electricity must be allocated equitably amongst the occupants of the units of a residential rental building that participates in an affordable housing program. At least 50 percent of the financial value of Net Energy Savings must be passed on to the residents.
d. Location– A qualified facility is treated as located on Indian Land or as located in a low-income community if the facility satisfies the Nameplate Capacity Test. Nameplate capacity for an electricity generating unit refers to the maximum output a unit can generate on a steady and continuous basis under standard conditions. If more than half of the nameplate capacity is on Indian Land or in a low-income community, it satisfies the Nameplate Capacity Test.
II. Proposed Program Requirements and Structure
e. PIS Prior to Allocation Award– Facilities placed in service prior to being awarded an allocation are not eligible to receive an allocation.
f. Selection Process– Previously, applications were accepted in a phased approach for 60 Day Application windows. The IRS has proposed a new approach going forward into 2023. The IRS expects applicants seeking an allocation to possibly exceed the total Capacity Limitation allocation available. The new process will include an initial application window in which applications received by a certain time and date would be evaluated together. Following this, a rolling application process will go into effect if the Capacity Limitation is not fully allocated after the initial application window closes. A lottery system may be introduced if there are too many similar applications. Priority will be given to facilities meeting at least one of two additional selection criteria.
g. Additional Selection Criteria– The Additional Selection Criteria apply to ownership and location. If a facility is owned by a tribal enterprise, an Alaska Native corporation, a renewable energy cooperative, a qualified renewable energy company, or a qualified tax-exempt entity, then it meets the additional ownership criteria. If a facility is in a Persistent Poverty County or in a census tract designated as disadvantaged in the Climate and Economic Justice Screening Tool (CEJST), then it meets the additional geographic criteria. Some document examples have been provided in the IRS’s publication of examples of forms that may be needed.
h. Sub-Reservations of Allocation for Facilities Located in a Low-Income Community– The IRS anticipates that Category 1 will receive the most applications, and that most applications will be for small rooftop residential solar facilities. Thus, 700 MW is being reserved for Category 1 Allocations, with 560 MW specifically being reserved for eligible residential behind the meter (BTM) facilities, including projects such as rooftop solar. The remaining allocation is being set aside for front of the meter (FTM) facilities and non-residential BTM facilities.
i. Application Materials– To ensure allocations are awarded to visible projects, the IRS as proposed a list of documents and attestations to be required within the application. Examples include executed interconnection, purchase/site control, and other agreements.
j. PIS Materials– Also proposed was the requirement of facilities that received an allocation to report to the Department of Energy (DOE) that the facility has been placed in service. Additionally, they will be required to provide additional documentation, including a permission to operate letter, a final professional engineer stamped as-built design plan, a benefit sharing agreement for qualified residential building projects between owner and tenants, a final list of households served, and a spreadsheet demonstrating expected financial benefits.
k. Post Allocation Compliance– Rules have been provided detailing disqualifications after receiving allocations and a recapture period for Section 48e Increase. Disqualifications can be caused by things such as; the location of the facility changing, the nameplate capacity increasing to exceed the 5 MW ac limitation or decreases by the greater of 2 kW or 25 percent of the capacity limitation awarded in the allocation, or not placing the facility into service within the 4 year time limit of the allocation to the facility.
Mahoney Development Services, LLC (MDS), an affiliate of Mahoney assists Real Estate Developers and Investors with consulting and advisory services to manage the busy development projects in their Real Estate portfolio. See below for what’s going on at MDS.
MDS is continues to work through for a busy application season to Minnesota Housing and other local funders. The team is working on a variety of projects including metro and greater Minnesota as well as new construction and preservation for new and current Mahoney clients. MDS is also continuing to work through closings on previously funded projects, with projects in across the state.
To learn more about Mahoney Development Services visit our MDS page.
Hi, my name is Veronica Naranjo Mata. I started at Mahoney as an associate in January 2021 on the Tax Solutions Team after graduating from the University of Wisconsin- River Falls. I have specialized in working mostly on real estate tax returns, thus leading me to join the Real Estate Solutions Team as well. My favorite returns to work on are Low Income Housing Tax Credit returns.
I am originally from Costa Rica but moved to the United States with my parents when I was in kindergarten. Since then, I have lived in River Falls, WI. I try to visit Costa Rica as much as I can. The majority of my extended family still lives there. When I am there, I spend most of my time visiting grandparents, aunts, uncles, cousins, and friends. My grandpa has a farm where I spend a lot of my time as well. We have cattle, pigs, horses, chickens, and grow coffee. Although it is my grandpa’s farm, most of my family members have become involved in one way or another, so I don’t expect the farm to leave our family anytime soon.
I enjoy travelling when I have time. In the last year I have traveled to Chicago, New York, San Diego, Las Vegas, Costa Rica, and Mexico. I have gotten pretty good at low-budget travel. My life-time goal is to visit every country in the Americas.
When I am not traveling, I enjoy going on walks on the trails behind my house, trying out new restaurants with friends, snuggling my two cats, and showing up randomly at my mom’s house (especially around dinner time).
Feel free to contact me with any questions regarding real estate development or Mahoney at firstname.lastname@example.org or connect with me on LinkedIn.
Photo credit for this section: Veronica Naranjo
Hello! I am Will Bates, and I wanted to introduce myself and share a little about my background. I have been with Mahoney since 2016, starting as an Associate with our Business Solutions Team. I provided QuickBooks consulting services as well as small business accounting and tax services. In 2018, I wanted to focus my career on tax and joined the Real Estate Solutions team as a Senior Associate, primarily involved in tax matters related to real estate development and compliance. Since then, I have continued to grow my career at the firm and have enjoyed being a small part of the work that Mahoney does in supporting our clients and being a helpful resource.
In my free time, I like to read, take long bike rides and spend time with my friends and family, ideally outside if time and the fickle Minnesota weather allows.
A hobby of mine is long distance running. I have run several marathons (six so far) and took a break a couple of years ago due to overuse injuries but plan to get back into it and am albeit slowly. I have friends in the local running community and enjoy the camaraderie and health benefits that being a part of the community can provide.
I also like to travel and recently went to Bozeman, Montana to visit family and have plans to visit my sister in London again, hopefully this year, who lives there with her husband and two children.
It has been fun sharing a bit about myself with you all. If you have questions about real estate development or tax matters, please feel free to reach out via email: email@example.com or connect with me on LinkedIn. I look forward to hearing from you.
Photo credit for this section: Will Bates (pictured on the right)