When the financial crisis left Low Income Housing Tax Credit (LIHTC) projects struggling to find investors, the American Recovery and Reinvestment Act of 2009 (ARRA) stepped in to provide funding for the Tax Credit Assistance Program (TCAP), a program that provides capital investments to projects awarded low income housing tax credits (LIHTC) between october 1, 2006 and Setpember 30, 2009.
The Office of Chief Counsel (OCC) of the Internal Revenue Service (IRS) recently released a memorandum regarding the proper federal income tax treatment of Tax Credit Assistance Program (TCAP) grants (which is different from a TCAP loan). The memorandum answered the following questions:
- Are Tax Credit Assistance Program (TCAP) grants considered gross income of the recipient? Yes, it is taxable income. “The Recovery Act does not specifically exclude TCAP grants from gross income, and the Code does not contain any specific exclusion for such grants. Additionally, the grants do not qualify for exclusion under ‘general welfare’ principles, because that exclusion is limited to governmental grants to low and moderate-income individuals to assist them in their individuals needs; the instant grants are made to business entities, e.g., partnerships and possibly corporations.”
- When are the Tax Credit Assistance Program (TCAP) grants taxed? Well that depends on the method of accounting.
o If the recipient utilizes the cash receipts and disbursement method of accounting, Tax Credit Assistance Program (TCAP) grants are not includible in gross income until the taxpayer may draw upon the funds in the account set up by the state agency. Consequently, they are includible in gross income when the project owner has access to the funds in the state agency account to pay for eligible costs.”
o If the recipient utilizes the accrual method of accounting, Tax Credit Assistance Program (TCAP) grants are “includable in gross income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy.” The memorandum concluded that “the income is fixed, and the amount is reasonably determinable, when the project owner and the state agency execute the TCAP written agreement, unless the written agreement provides that the TCAP grant is due at another time.”
To read the memorandum in its entirety, click here.