Low Income Housing Credits – Tax and Accounting Issues
Roger Poulin, Tax Principal
Many banks these days are investing in affordable housing projects to fulfill their CRA obligations, as well as to gain tax advantages from these “low income housing credit (LIHC)” investments. In the March 11, 2016 issue of the Maine Bankers Newslink, we discussed the tax and accounting ramifications of these investments. With apologies to those of you who may have already read that article, we thought that it was worth repeating, especially for those who may not receive that publication.
Low income housing investments stimulate community and economic development, expand opportunities for additional revenue streams and offer diversification within investment products. In many cases, the affordable housing project investment may help satisfy a bank’s CRA obligation.
However the main selling point which sets LIHC projects apart from other community investments is their tax advantages. The advantages from a tax perspective are twofold – real estate rental losses that pass through to be deducted on the bank’s tax return, plus low income housing credits which can reduce the bank’s income tax liability over a ten-year period. There are limitations based on the bank’s regular and alternative minimum tax so a bank should consult its tax adviser before entering into housing credit investments. Where the full tax benefits are available, these investments often generate a positive return since the credits and savings on tax deductions exceed the initial investment.
There are several organizations in New England that package LIHC investments for community banks. As part of your bank’s due diligence, management should review the sponsoring organization’s track record.
These investments can be accounted for under GAAP by one of three methods, cost, equity or proportional methods, with the cost or proportional methods being the most common.
Under the cost method the bank would amortize the excess of the carrying amount of the investment over its estimated residual value during the periods in which tax credits are allocated to the investor and charge the amortization to operating expense.
Under the proportional amortization method, the investor amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits allocated to the investor. New accounting rules effective for 2015 allow investors to more easily qualify for this method, which allows the amortization to be charged to tax expense. If a bank uses this method, all qualifying investments must be accounted for under this method.
Investments in affordable housing tax credit projects are a popular tax planning vehicle for banks. However as noted above, not all banks will be eligible to fully take advantage of the tax benefits and, like any other investment it is important you carefully review the prospectus, and evaluate the developer.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.