Affordable Housing-Paying for Your Section 168(h) Election

When a nonprofit is involved in an affordable housing or similar project with a for profit investor, the nonprofit generally uses a taxable for profit subsidiary to hold the property. The benefit of this is that the property can be depreciated over 27 ½ years rather than 40 years, which means a better tax results for the investor, and translates to a higher price for the tax credits.
However, to get this treatment the taxable subsidiary must make an election under Internal Revenue Code section 168(h)(6)(F)(ii). The effect of this election is that
dividends or interest, paid from the taxable subsidiary to the nonprofit parent, are taxable as Unrelated Business Income.
This requirement only exists when not all tax attributes between the project and its owners (share of income and loss, distributions, equity) are the same. But, that usually is the case for these joint venture projects
Additionally, any gain from disposition of an interest in the taxable subsidiary is also taxable as Unrelated Business Income to the nonprofit.
Techniques for reducing tax on dividends, interest or dispositions include, first repaying all loans and developer fees to the nonprofit sponsor. Additionally, the entity holding the project (usually a limited partnership) can make payments directly to the nonprofit as reimbursement for expenses. However, the nonprofit needs to document that these expenses are costs the nonprofit has incurred in behalf of the project.
Examples of allowable costs include payroll and related taxes, and benefits, as well as indirect costs that are necessary for providing services to the project. Indirect costs ​ typically include items such as occupancy, insurance, general accounting, and administration.

Changes in Your Legal Form

If a charity changes its incorporation from one state to another or makes a similar significant change to its legal entity, but no changes to its operations, it generally had to apply for exempt status much like a new organization. IRS made that process significantly easier with the new procedure known as Revenue Procedure 2018-15.
The Revenue Procedure allows an organization to migrate its nonprofit status to the new legal entity when there are no significant changes in the organization’s operations.
We had a chance to try the new procedure recently for an organization that had a flaw in its original incorporation document. The organization needed to form a new corporation with a slightly different name. We were successful in getting exempt status transitioned to the new organization without a new application for exemption.
Check the Revenue Procedure online or contact us for information about how this procedure works and when it applies.