Carryover Allocations and 10% Test

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• Carryover Allocations and 10 Test
• IPED Housing Tax Credits 101October 12-13,
  2006By John R. Condon, Esq.

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Federal Placement in Service Deadlines
General Rule A project must generally be placed in service in the year that the low income housing tax credit is allocated by the tax credit agency
Carryover Exception A project which receives a valid carryover allocation may be placed in service no later than the end of the second calendar year after the year that a carryover allocation is made To obtain such an extension, a project must receive a valid carryover allocation agreement and satisfy the 10 test in a timely manner

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Requirements for a Valid Carryover Allocation

• The address of the building (or if none exists, a
  specific description of its location)
• The name, address and taxpayer identification
  number of the building owner
• The name and address of the state tax credit
  agency
• The taxpayer identification number of the state
  tax credit agency
• The date of the allocation
• The credit dollar amount allocated to the
  building
• The taxpayers total reasonably expected basis in
  the project as of the close of the second
  calendar year after the allocation year
• The taxpayers basis in the project at the close
  of the calendar year in which the allocation is
  made and the percentage that this amount bears to
  the total reasonably expected basis
• The date the building is expected to be placed in
  service
• The building identification number assigned to
  the building

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Satisfying the 10 Test

• Federal Rule 10 of the reasonably expected
  basis in the project (as of the close of the
  second calendar year) must be paid or incurred by
  the later of (i) the end of the calendar year for
  which the credit allocation is made, or (ii) six
  (6) months after the date of the carryover
• States may impose stricter standards as long as
  the terms do not violate the Federal credit rules
• 10 test is a cliff test

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Defining Reasonably Expected Basis For 10 Test
Purposes

• Reasonably expected basis means the adjusted
  basis of land and depreciable property (whether
  or not it is included in eligible basis)
• Basis attributable to non-residential rental
  property (i.e., commercial property/site
  improvements) may be includable in carryover
  allocation basis even though such property is not
  included in eligible basis
• Eligible costs include building/construction
  costs, related personal property and land costs
• Ineligible costs include permanent loan fees,
  reserves, syndication fees, partnership
  organizational costs and tax credit fees
• Costs may be incurred by taxpayer prior to the
  calendar year of the allocation
• QCT/DDA increases not included in 10 test
  calculations

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Common 10 Test Expenditures

• Acquisition costs for land and buildings
• Construction costs (e.g., materials, permits,
  etc.)
• Development fee
• Fees for services (e.g., architect, contractor
  and engineer)
• Construction financing fees/construction period
  interest

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10 Test Review

• Examples of Supporting Documentation
• and
• Tax Considerations

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Acquisition of Land/Buildings

• Documentation
• Recorded deed to entity receiving carryover
  allocation
• Title insurance policy
• Settlement statement
• Purchase money note/mortgage
• Other financing documents (including evidence of
  at least 10 cash down payment)
• Appraisal

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Construction Costs

• Documentation
• Construction contract
• Invoices/draw requests for all costs
• Lumber and materials need to review storage
  contracts, evidence of insurance, down payment
  and promissory note for any unpaid balance

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Developer Fees

• Documentation
• Development agreement
• Need to review the written development agreement
  in place on 10 test deadline date
• Scope of work limited to eligible services
• Agreement must include benchmarks for earning fee
• Confirm that benchmarks are satisfied to properly
  include development fee in 10 test calculation

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Fees for Services

• Documentation
• Written agreements (such as architect/engineering
  contracts) describing services
• Invoices and work product for services rendered
  (such as environmental reports and market
  studies)
• Statements of legal/accounting costs must be
  related to the actual acquisition/construction of
  the project (not for syndication, partnership
  formation or permanent loans)

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Construction Financing Feesand Construction
Period Interest

• Documentation
• Evidence of obligation to pay, such as loan
  agreement or promissory note and interest
  statements
• Additional issues with construction/permanent
  loans

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10 Test Review

• Additional Considerations

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Incurring the Costs

• Entity receiving the carryover allocation must be
  the entity that has incurred the costs
• If the entity is incurring an expense without
  actually paying the cost, the entity must be an
  accrual basis taxpayer (the election to be on the
  accrual basis is made on the entitys first tax
  return)
• If the entity incurring a cost is not the entity
  which has received tax credit allocation, the
  parties should execute a Reimbursement Agreement
  obligating the entity receiving the allocation to
  reimburse the entity providing the services

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