The IRS released Notice 2010-18 to clarify certain issues under Sections 1404 and 1602 of the American Recovery and Reinvestment Tax Act of 2009 (Pub. L. 111-5) (ARRA). The Notice provides guidance (i) on how to take into account the amount of a grant under Section 1602 of the ARRA in reducing the amount of a state’s housing credit ceiling, (ii) on the exclusion of the amount of grants from the recipients’ gross income, and (iii) on the effect of such grants on the depreciable or eligible basis of property.
Credit Equivalent of Cash Assistance and Tracking Under §42(i)(9)(A)
The Notice clarifies that state agencies must track the 2009 Credit Ceiling (Ceiling) exchanged separately by the credit ceiling components in Section 42(h)(3)(C)(i) through (iv). State agencies are under a duty to track the total credits allocated and the credit equivalent of cash assistance amounts to ensure that the total credits allocated from the Ceiling and the credit equivalent of the total cash assistance amounts granted by the state under Section 1602 of the ARRA do not exceed the Ceiling. The credit equivalent of a cash assistance amount is determined by dividing the cash assistance amount by 8.5 and rounding the result to the nearest dollar. The Ceiling is then reduced by the credit equivalent of any cash assistance amounts given by the state agency under Section 1602 of the ARRA to determine the remaining credit available for use in making credit allocations by the state agency. However, to determine the maximum cash assistance amount available to the state under Section 1602 of the ARRA, the maximum cash assistance amount would be reduced by the actual cash assistance amounts granted by the state and not their credit equivalents. To ensure that credits allocated and the credit equivalent of cash assistance amounts from any of the components of the Ceiling do not exceed credits available from those components, a state agency should multiply the credit amount used to elect a cash assistance amount by the percentage applicable to that credit amount under Section 1602(b)(1) of the ARRA, and then reduce the Ceiling accordingly.
Income Tax Treatment of Subawards
In relying on the legislative history of the ARRA, the Notice provides that subawards (i.e., awards to project owners) made pursuant to Section 1602 of the ARRA are excluded from the gross income of recipients and are exempt from federal taxation.
Basis Treatment of Subawards
Notice 2010-18 cites the legislative history of the ARRA, which states that grants received under Section 1602 of the ARRA do not reduce the basis of a qualified low-income building. The Notice thus provides by extension that that subawards made pursuant to Section 1602 of the ARRA are not federal grants for purposes of Section 42(d)(5)(A) and do not reduce depreciable (i.e., adjusted) basis or eligible basis of a qualified low-income building.
Notice 2010-18 is consistent with the advice that has been generally given by housing credit tax advisors. We would also point out that state tax laws should be reviewed to determine whether subawards are state taxable.