On December 18, 2015, the landscape improved for individuals and businesses looking to invest in affordable housing, economic development and renewable energy projects. Congress passed and the President signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which makes permanent many tax extenders that had been routinely extends by Congress on a one- or two-year basis, and retroactively extended a host of other tax provisions. Some highlights of interest for tax credit investors are noted below.
Low-Income Housing Tax Credit (LIHTC)
The LIHTC provides funding for the cost of low income housing development by allowing investors a federal tax credit equal to a percentage of the cost incurred for development of low-income units in rental housing projects, and is claimed annually over a 10-year period. The credit has been permanent under the tax code, but the rate used to calculate the credit amount fluctuated, and the effective rate ended up at approximately 7.5 percent. The PATH Act effectively placed a floor at 9 percent, which means investors have more incentive to help finance the construction of affordable housing projects.
New Markets Tax Credit
The federal new markets tax credit applies to qualified equity investments (QEI) made in a “community development entity” (CDE). The credit is 5 percent of the QEI for the year in which the QEI is made and for the first two anniversary dates after such investment, plus 6 percent on each anniversary date thereafter for the following four years (for a total credit equaling 39 percent of the QEI). Under pre- PATH Act law, the credit expired at the end of 2015. The PATH Act retroactively extends the new markets tax credit through 2019 and extends the carry-over period for unused new markets tax credits through 2024.
Renewable Energy Tax Credits
The Solar Investment Tax Credit (ITC) is a 30 percent tax credit for solar systems on residential and commercial properties, so long as construction begins by a certain date (under pre-PATH Act rules, prior to the end of 2016). Under the PATH Act, the credit percentage will remain at 30 percent, but the “begin construction deadline” has been extended five years, to the end of 2021. The available credit will decline each year in 2021 and 2022 before becoming 10 percent in 2022.
The Wind Production Tax Credit (PTC) provides wind developers with a credit of $0.023 per kilowatt-hour for electricity generated to the power grid, a subsidy that had expired at the end of 2014.
The PATH Act retroactively extends the PTC and maintains its level through 2016, but will start phasing down at 80 percent of its present value in 2017, 60 percent in 2018, and 40 percent in 2019. As with the ITC, the “begin construction deadline” for the production tax credit has been extended five years, in the case of the PTC, to December 31, 2019.