With the Low-Income Housing Tax Credit (Housing Credit) financing over 100,000 affordable homes each year, any regulations impacting the Housing Credit can have far-reaching effects on our nation’s ability to produce and preserve affordable housing. The Housing Credit falls under the jurisdiction of the Internal Revenue Service (IRS) and the Treasury Department, though it is also impacted by regulations issued by the Department of Housing and Urban Development (HUD), regulators of the Community Reinvestment Act (CRA), the Federal Housing Finance Agency, and other agencies. Learn more about some of the key regulatory issues impacting the Housing Credit below.
Regulatory Issues Resource Center
IRS Housing Credit Guidance in Response to the COVID-19 Crisis
The COVID-19 pandemic has brought on barriers and challenges that threaten the development and operation of Housing Credit properties. These barriers include construction labor shortages and delays that increase development costs; the unavailability of gap financing due to the cost of the COVID-19 crisis to state and local governments; financial penalties for missed development deadlines; market instability that can increase costs and decrease Housing Credit equity; increased operating expenses compounded by decreased rent payments; and other unforeseen obstacles. In response, the AHTCC and our partners have advocated for Housing Credit regulatory flexibilities and accommodations to ensure that Housing Credit development and operations can move forward.
To urge that deadlines be further extended and additional flexibilities be provided considering the continued impact of the pandemic, on September 10, 2021, the AHTCC provided a letter to the IRS and Treasury Department in support of National Council of State Housing Agencies (NCSHA) requests.
On January 15, 2021, the Internal Revenue Service (IRS) issued long-awaited guidance (Notice 2021-12) to extend Housing Credit program deadlines and provide other flexibilities in light of the ongoing disruption to affordable housing development, construction and operations brought on by the COVID-19 pandemic. Learn about the guidance on our blog, and see a matrix developed by National Council of State Housing Agencies (NCSHA) to compare the January 2021, IRS Revenue Procedures 2014-49 and 2014-50, and the full list requested by NCSHA and in our sign-on letter.
In November 2020, the AHTCC led an effort in which over 140 of our partners signed onto a letter to the IRS and Treasury to request deadline extensions and other accommodations for the Housing Credit related to the COVID-19 pandemic.
In July, 2020, the IRS issued IRS Notice 2020-53, which provided important deadline extensions and other accommodations for the Housing Credit, including extensions of the 10 percent test and rehabilitation expenditures deadlines, compliance and review moratoriums, and other flexibilities needed to address COVID-19-related challenges, like social distancing policies. See the details of the original COVID-19-related guidance on our blog.
On the same day, the IRS also proposed regulations to relax previous compliance monitoring regulations that were due to be implemented in 2021. The previous regulations would have increased the number of units state agencies need to monitor, creating additional burden and negatively impacting the provision of affordable housing. For more information on the new regulations, see the NCSHA blog.
IRS Proposed Regulations Regarding the Average Income Test
The IRS released proposed regulations in October 2020 that were intended to provide clarity around the ‘income averaging’ flexibility, the third minimum set-aside for the Housing Credit. The AHTCC, our partners and affordable housing champions in Congress initially advocated for the income averaging flexibility in order to make more types of affordable housing financially feasible and allow the program to serve a broader range of low-income tenants. It was first introduced in legislation in the Affordable Housing Tax Credit Improvement Act of 2017 and was enacted through the 2018 omnibus spending package.
However, the IRS’ proposed regulations regarding the Average Income Test would severely limit utilization of the income averaging flexibility, and are already having that effect in their proposed form. On December 29, 2020, the AHTCC submitted comments in response to the proposed regulations, suggesting mitigation remedies to ensure that income averaging remains a viable option.
On March 24, 2021, the IRS held a hearing on proposed Low-Income Housing Tax Credit (Housing Credit) Average Income Test Regulations, in which Emily Cadik, Executive Director of the AHTCC, and Michael Gaber, Chairman of the AHTCC Board of Directors and Executive Vice President at WNC, Inc. testified on behalf of the AHTCC.
Issues Relating to Amending Tax Returns and Forms 8609
The AHTCC has been pursuing a solution to address issues that have arisen related to when Housing Credits could be claimed relative to the receipt of the Low-Income Housing Credit Allocation and Certification (Form 8609), which could create delays that ultimately impact the amount of tax credit equity available for affordable housing properties.
Please note that, by providing these materials, the AHTCC is not providing tax advice, and each company will have to consult with its attorneys and accountants to weigh benefits and risks and draw its own conclusions when determining a path forward.
Prior to 2018, Housing Credits earned in a prior year could be claimed by amending a previously filed return upon receipt of the Forms 8609, even if the receipt of the forms was after the extended due date for the partnership return. Due to the new Bipartisan Budget Act regime, returns must be adjusted through an Administrative Adjustment Request (AAR), and investors claim the Housing Credits included in an AAR on the return for the year in which the AAR is filed rather than the year in which the Housing Credits were generated. The new regime could ultimately impact the amount of tax credit equity available for affordable housing properties, at a time when affordable housing is needed more than ever.
Learn more in the resources below.
On June 25, the AHTCC held a webinar featuring leading industry experts to provide an overview of the above issue and an approach to consider.
- Michael Gaber, Executive Vice President, WNC, Inc., and President of the Board of Directors, Affordable Housing Tax Credit Coalition
- Glenn Graff, Attorney, Applegate & Thorne-Thomsen
- Beth Mullen, Partner, Affordable Housing Industry Leader, CohnReznick
- Michael Novogradac, Managing Partner, Novogradac & Co.
The AHTCC has worked with the IRS and many of our members, including leading affordable housing accounting and law firms, in asking the IRS to allow a partnership to claim Housing Credits prior to the receipt of Forms 8609 based on a “reasonable cause” approach, if the failure to have Forms 8609 is due to reasonable cause and not due to willful neglect consistent with Section 42(l)(1). Learn more about this approach in our memo, AHTCC Considerations for Amending Returns and Forms 8609 and see a summary on our blog.
On April 8, the IRS released a COVID-19 related revenue procedure that allows once again the amending of Bipartisan Budget Act (BBA) partnership tax returns once Form 8609s are received for 2018 tax returns, as long as the partnership files an amended return by September 30, 2020. The guidance impacts properties that took advantage of the extended filing date for 2018 returns, but does not provide a long-term solution.
Learn more on our blog.
Community Reinvestment Act Reform
An estimated 73 percent of Housing Credit investment comes from banks motivated by CRA requirements, meaning any changes to CRA could have significant effects on investment in the Housing Credit – and ultimately on our ability to build and preserve affordable housing.
Office of the Comptroller of the Currency Updates
While the Office of the Comptroller of the Currency (OCC) only oversees roughly 20 percent of banks, those banks represent 70 percent of financial institution assets and the vast majority of institutions that invest in the Housing Credit (see analysis from Novogradac and Co.) The other two CRA regulators are the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve.
The OCC released its final rule on CRA reform (see the press release) in late May 2020, just six weeks after it received more than 7,000 comments in response to its proposed rule. While the final rule includes some improvements from the OCC and FDIC proposed rule that the AHTCC and our partners recommended – including new specifications about the use of multipliers, the treatment of Housing Credit investments, and the expansion of deposit-based assessment areas – several of the overarching concerns we noted in our comments on the proposal remain. Most significantly, the final rule repeals the separate investment test, includes a ratio evaluation approach with a very expansive list of CRA-eligible activities, and does not provide benchmarks for the overall CRA evaluation measure or a specific community development minimum, which the rule states will be released after another Notice of Proposed Rulemaking. The FDIC did not join the OCC in issuing a final rule. See our blog for more information.
In April 2020, the AHTCC submitted comments, in response to the OCC and FDIC’s Notice of Proposed Rulemaking (NPR) on CRA reform. Above all, we urged that any changes to CRA preserve the incentive it provides for investment in the Housing Credit and maintain our current ability to produce homes that are affordable to low-income households. Learn more about our comments on our blog.
In September 2019, the AHTCC and 27 community development stakeholders signed a letter urging regulators to act cooperatively and thoughtfully as they look to modernize the Community Reinvestment Act (CRA). Sent to the Chairwoman of Federal Deposit Insurance Corporation (FDIC), the Chairman of the Federal Reserve Board of Governors (Federal Reserve), and the Comptroller of the Currency, the letter calls on the three regulators to issue uniform CRA regulations.
In November, 2018, the AHTCC submitted comments in response to the OCC’s Advance Notice of Proposed Rulemaking. We urged that any changes to the CRA continue to support robust investment in the Housing Credit, to ensure that our nation’s primary affordable housing delivery mechanism is at least as efficient and effective as it is today. Read more on our blog.
Federal Deposit Insurance Corporation Updates
On December 12, 2019, the Federal Deposit Insurance Corporation (FDIC) joined the OCC in releasing a Notice of Proposed Rulemaking (NPR) on CRA modernization, but did not join the OCC in issuing a final rule in May 2020. On the day the OCC released its final rule, FDIC Chairman Jelena McWilliams said in a statement that the agency was “not prepared to finalize the CRA proposal at this time.” The agency has not publicly indicated its path forward.
Federal Reserve Updates
The AHTCC submitted comments in response to the Federal Reserve Board of Governor’s Community Reinvestment Act (CRA) reform proposal. The AHTCC appreciates the Federal Reserve’s goal to more effectively meet the needs of low- and moderate-income communities, and recognition of the importance of affordable housing. Our comments center on two main points: We urge that any changes to CRA continue to incentivize robust investment in affordable housing through the Housing Credit, and that the new regulations help to address CRA-driven distortions in investment between different regions. Learn more on our blog.
The Federal Reserve’s proposal (see fact sheet) is an alternative to the Office of the Comptroller of the Currency’s (OCC) CRA rule finalized in May of 2020. The Biden Administration is not expected to implement the OCC’s final rule, and the Federal Reserve’s proposal is instead expected to serve as a starting point for rulemaking among all three regulators – the Federal Reserve, OCC, and Federal Deposit Insurance Corporation. Learn more about the proposal on our blog.
- June 2020: During a House Financial Services Committee hearing on Monetary Policy and the State of the Economy, Federal Reserve Board of Governors Chairman Jerome Powell indicated that the Federal Reserve will release its own proposal to reform the CRA, explaining that it aims to have broad support from intended beneficiaries and that it is still working to finalize its approach.
- January 2020: At an Urban Institute event, Federal Reserve Governor Lael Brainard provided an overview of an approach the Federal Reserve may consider. In her speech, she emphasized the Federal Reserve’s aim to develop a test grounded in empirical analysis, proposing a tailored metrics approach with separate retail and community development tests. She did not, however, provide details about how individual activities would be counted or weighted.
- June 2019: Federal Reserve report summarized feedback from 29 round tables it held with bankers and community groups across the nation on the topic of CRA modernization. Some of the feedback was related to issues raised by the AHTCC in comments submitted to the OCC the year prior, which included proposals to provide increased weighting for investment in rural, underserved, and Native American areas; flexibility for banks to further serve underserved areas beyond their defined assessment areas; the ability to account for the impact of investments in the CRA credit calculation; and significant concern about the proposed single metric system.
- March 2019: Federal Reserve Governor Lael Brainard discussed ideas to update CRA to more effectively mobilize community and economic development. Brainard suggested expanding assessment areas for community development activities beyond those for retail activities, developing a comprehensive community development test, accounting for online retail activity, tailoring requirements based on bank size and activities, collecting additional data, and providing consistency across regulators.
OCC Tax Equity Finance Rule
On August 3, 2020, the AHTCC submitted comments on the Office of the Comptroller of the Currency’s (OCC) notice of proposed rulemaking (NPR) on the Activities and Operations of National Banks and Federal Savings Associations (see the OCC’s press release). While the majority of the NPR related to the energy sector, a section on a Tax Equity Finance Transaction rule (TEF Regulation) could allow an additional authority to invest in the Housing Credit beyond national banks’ Public Welfare Investment Authority and federal savings associations’ Community Development Investment Authority. In a final rule published December 22, 2020, the OCC adopted our recommendation to clarify that the TEF Regulation is separate and apart from the Public Welfare Investment Authority and Community Development Investment Authority, and that the proposal is an addition but not a substitute for the existing authority.