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Federal Register / Vol. 86, No. 172 / Thursday, September 9, 2021 / Notices cases median income levels within MSAs. In this QCT designation, HUD
uses the OMB metropolitan area definitions published in OMB Bulletin No. 1701, without modification for purposes of evaluating how many census tracts can be designated under the population cap but uses the HUDmodified definitions and their associated area median incomes for determining QCT eligibility.
Because the 2010 Decennial Census did not include questions on respondent household income, HUD uses ACS data to designate QCTs. The ACS tabulates data collected over 5 years to provide estimates of socioeconomic variables for small areas containing fewer than 65,000 persons, such as census tracts.
Due to sample-related anomalies in estimates from year to year, HUD
utilizes three sets of ACS tabulations to ensure that anomalous estimates do not affect QCT status.
IV. Background The U.S. Department of the Treasury Treasury and the Internal Revenue Service IRS are authorized to interpret and enforce the provisions of IRC
Section 42. In order to assist in understanding HUDs mandated designation of DDAs and QCTs for use in administering IRC Section 42, a summary of the section is provided below. The following summary does not purport to bind Treasury or the IRS in any way, nor does it purport to bind HUD, since HUD has authority to interpret or administer the IRC only in instances where it receives explicit statutory delegation.
V. Summary of the Low-Income Housing Credit
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A. Determining Eligibility The LIHTC is a tax incentive intended to increase the availability of lowincome rental housing. IRC Section 42
provides an income tax credit to certain owners of newly constructed or substantially rehabilitated low-income rental housing projects. The dollar amount of the LIHTC available for allocation by each state credit ceiling is limited by population. Section 42
allows each state a credit ceiling based on a statutory formula indicated at IRC
Section 42h3. States may carry forward unallocated credits derived from the credit ceiling for one year;
however, to the extent such unallocated credits are not used by then, the credits go into a national pool to be allocated to qualified states as additional credit.
State and local housing agencies allocate the states credit ceiling among low-income housing buildings whose
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owners have applied for the credit.
Besides IRC Section 42 credits derived from the credit ceiling, states may also provide IRC Section 42 credits to owners of buildings based on the percentage of certain building costs financed by tax-exempt bond proceeds.
Credits provided based on the use of tax-exempt bond proceeds do not reduce the credits available from the credit ceiling. See IRC Section 42h4.
The credits allocated to a building are based on the cost of units placed in service as low-income units under particular minimum occupancy and maximum rent criteria. Prior to the enactment of the Consolidated Appropriations Act, 2018 the 2018
Act, under IRC Section 42g, a building was required to meet one of two tests to be eligible for the LIHTC; either: 1 20
percent of the units must be rentrestricted and occupied by tenants with incomes no higher than 50 percent of AMGI, or 2 40 percent of the units must be rent-restricted and occupied by tenants with incomes no higher than 60
percent of AMGI. A unit is rentrestricted if the gross rent, including an allowance for tenant-paid utilities, does not exceed 30 percent of the imputed income limitation i.e., 50 percent or 60
percent of AMGI applicable to that unit. The rent and occupancy thresholds remain in effect for at least 15 years, and building owners are required to enter into agreements to maintain the lowincome character of the building for at least an additional 15 years.
The 2018 Act added a third test, the average income test. See IRC Section 42g1, as amended by Public Law 115141, Division T, Section 103a1
March 23, 2018. A building meets the minimum requirements of the average income test if 40 percent or more 25
percent or more in the case of a project located in a high cost housing area as described in IRC Section 142d6 of the residential units in such project are both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit. The taxpayer designates the imputed income limitation for each unit. The designated imputed income limitation of any unit is determined in 10-percentage-point increments, and may be designated as 20, 30, 40, 50, 60, 70, or 80 percent of AMGI. The average of the imputed income limitations designated must not exceed 60 percent of AMGI. See IRC
Section 42g1C.
B. Calculating the LIHTC
The LIHTC reduces income tax liability dollar-for-dollar. It is taken
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annually for a term of 10 years and is intended to yield a present value of either: 1 70 percent of the qualified basis for new construction or substantial rehabilitation expenditures that are not federally subsidized as defined in IRC Section 42i2, or 2
30 percent of the qualified basis for the cost of acquiring certain existing buildings or projects that are federally subsidized. The tax credit rates are determined monthly under procedures specified in IRC Section 42 and cannot be less than 9 percent of the qualified basis of new buildings that are not federally subsidized, and not less than 4 percent of the qualified basis of buildings that are federally subsidized.
Individuals can use the credits up to a deduction equivalent of $25,000 the actual maximum amount of credit that an individual can claim depends on the individuals marginal tax rate. For buildings placed in service after December 31, 2007, individuals can use the credits against the alternative minimum tax. Corporations, other than S or personal service corporations, can use the credits against ordinary income tax, and, for buildings placed in service after December 31, 2007, against the alternative minimum tax. These corporations also can deduct losses from the project.
The qualified basis represents the product of the buildings applicable fraction and its eligible basis. The applicable fraction is based on the number of low-income units in the building as a percentage of the total number of units, or based on the floor space of low-income units as a percentage of the total floor space of residential units in the building. The eligible basis is the adjusted basis attributable to acquisition, rehabilitation, or new construction costs depending on the type of LIHTC
involved. These costs include amounts chargeable to a capital account that are incurred prior to the end of the first taxable year in which the qualified lowincome building is placed in service or, at the election of the taxpayer, the end of the succeeding taxable year. In the case of buildings located in designated DDAs or designated QCTs, or for credits awarded from the states per capita allocation, buildings designated by the state agency, eligible basis may be increased up to 130 percent from what it would otherwise be. This means that the available credits also may be increased by up to 30 percent. For example, if a 70 percent credit is available, it effectively could be increased to as much as 91 percent 70
percent 130 percent.

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