On Wednesday February 26, House Ways & Means Committee Chairman Dave Camp (R-Mich.) released his long-awaited draft Tax Reform Act of 2014. The draft legislation contains many significant provisions relating to the Low-Income Housing Tax Credit and would also repeal the Historic Rehabilitation Tax Credit and various renewable energy credits. Over the next several days NH&RA will analyzing the legislation further and will be updating this story as we better understand the implications of the proposed legislation.
Below is a summary of key provisions as described in the Ways & Means Committee Section by Section Summary:
Sec. 3204: Low-Income Housing Tax Credit
Under the provision, the LIHTC would be modified in several ways.
Allocation of basis: Under the provision, State and local housing authorities would allocate qualified basis, rather than credit amounts. The annual amount of allocable basis for each State would be equal to $31.20 multiplied by the State’s population, with a minimum annual amount of $36,300,000. The annual amount would continue to include unused basis allocations from the prior year plus basis allocations returned to the State during the calendar year from previous allocations. The national pool of unused credits, however, would be eliminated.
Credit period: Under the provision, the credit period would be extended from 10 years to 15 years to match the current 15-year compliance period. Because the credit period would be aligned with the compliance period, the recapture rules also would be repealed as no longer necessary to ensure that the building continues to be a low-income housing project for the duration of the tax benefit.
Credit amount: Under the provision, the 4-percent credit would be repealed. The 9-percent credit for newly constructed property and substantial rehabilitations would be retained. In addition, Federally funded grants would not be taken into account in determining the eligible basis of a building for purposes of the credit. As a result, the credit would apply to private funding of low-income housing and not provide an additional subsidy for Federal funding of such projects. The amount of the credit would continue to equal the qualified basis in the qualified low-income building multiplied by the applicable percentage. Under the provision, the IRS would determine the applicable percentage generally for the month that the building is placed in service, which would be equal to the percentage that would yield over a 15-year period a credit amount that would have a present value equal to 70 percent of the qualified basis of the building.
Other changes: Under the provision, several other rules would be modified. First, the increased basis rule for high-cost and difficult development areas would be repealed. Second, the general-public-use requirement would be revised to eliminate the special occupancy preference for members of specific groups under certain Federal or State programs and the special preference for individuals involved in artistic and literary activities. Instead, occupancy preferences would only be permitted for individuals with special needs and for veterans. Third, the provision would repeal the requirement that States include in their low-income-housing selection criteria the energy efficiency of the project and the historic nature of the project.
The provision would be effective for State basis amounts and allocations of such amounts determined for calendar years after 2014. A transition rule would translate credit allocations prior to 2015 into equivalent amounts of eligible basis for purposes of determining new allocations of basis after 2014.
- The LIHTC provides an important private-sector alternative to Federally financed and operated housing for low-income individuals (e.g., Section 8 housing).
- According to the non-partisan Joint Committee on Taxation (JCT), the provision would increase the amount of LIHTC-financed projects by more than 5 percent in 2015 (from $9.3 billion to $9.8 billion), while reducing the cost to taxpayers.
- By modernizing the credit, the provision would provide a more transparent benefit by permitting States to allocate the basis that supports low-income housing units.
- The provision also would align the credit period with the current 15-year compliance period to ensure that the housing project continues to meet its low-income purpose for the duration of the tax benefit.
- The provision would simplify the current credit, which is the longest section of the Code today, by streamlining many complex provisions and eliminating several special rules.
JCT estimate: According to JCT, the provision would increase revenues by $10.7 billion over 2014-2023.
Secs. 3431-3432. Termination of private activity bonds; Termination of credit for interest on certain home mortgages.
Under current law, interest on both governmental bonds and private activity bonds (PABs) is excluded from gross income (and thus exempt from tax). Under the provisions, interest on newly issued PABs would be included in income and thus subject to tax. Additionally, no Federal tax credits would be allowed for mortgage credit certificates issued after 2014. The provisions would be effective for bonds issued after 2014 with regard to PABs and tax years ending after 2014 with regard to mortgage credit certificates.
JCT estimate: According to JCT, the provisions would increase revenues by $23.9 billion over 2014-2023.
Sec. 3223. Repeal of rehabilitation credit.
Under the provision, the rehabilitation credit would be repealed. The provision would be effective for amounts paid after 2014. Under a transition rule, the credit would continue to apply to expenditures incurred through the end of 2016, to rehabilitate a qualified rehabilitated building or a certified historic structure acquired before 2015. However, for a qualified rehabilitated building, the 24-month rehabilitation period for claiming the credit must also begin on or before January 1, 2015.
JCT estimate: According to JCT, the provision would increase revenues by $10.5 billion over 2014-2023.
Sec. 3224. Repeal of energy credit.
Under the provision, the credit 30-percent nonrefundable, business energy credit for the cost of certain new equipment that either (1) uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat, or (2) is used to produce, distribute, or use energy derived from a geothermal deposit (but only, in the case of electricity generated by geothermal power, up to the electric transmission stage) would be repealed. The provision is effective for property placed in service after 2016.
JCT estimate: According to JCT, the provision would have no revenue effect over 2014-2023.
Sec. 3206. Phaseout and repeal of credit for electricity produced from certain renewable resources.
Under current law, a taxpayer may claim a credit a credit (the production tax credit or PTC) is allowed for the production of electricity from qualified energy resources. Qualified energy resources are comprised of wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy Under the provision, the inflation adjustment would be repealed, effective for electricity and refined coal produced or sold after 2014. Therefore, taxpayers’ credit amount would revert to 1.5 cents per kilowatt-hour for the remaining portion of the 10-year period. The entire production tax credit would be repealed, effective for electricity and refined coal produced and sold after 2024.
Consideration: Businesses in the wind industry have represented to the Committee that that the industry could survive with a credit worth 60 percent of the current credit, implying that the credit provides a windfall that does not serve the intended policy.
JCT estimate: According to JCT, the provision would increase revenues by $9.6 billion over 2014-2023.
New Markets Tax Credit
The proposed legislation does not include any provisions relating to the extension of the New Markets Tax Credit which is currently expired.