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Winter 2019 Newsletter

Fall 2019 Newsletter

Affordable Housing Developers May Benefit from Opportunity Zone Tax Break

A new tax break for individuals and entities who develop property in Opportunity Zones can also benefit affordable housing developers. The Opportunity Zones include 9000 census tracts around the country including some in Rochester and surrounding areas throughout upstate New York. Tax breaks for investors include deferred tax on capital gains from the sale of land, buildings, businesses or stock. In addition, those capital gains can be reduced or eliminated, depending on how long they hold Opportunity Zone projects. When Opportunity Zone projects are held for 10 years or more, tax on the capital gain is eliminated. Most Affordable Housing projects are held for longer than that. The new regulations also confirm that either partnerships or their partners can qualify for deferral and reduced taxation of their capital gains by investing in these projects. When making improvements to existing facilities, those improvements need to be “substantial”. The new regulations clarify that only the cost of the building (not the land) will be considered when determining whether an improvement is “substantial”. Affordable Housing projects generally take longer than commercial projects. The new regulations will allow tax benefits for projects that go on for approximately 2 ½ years, as long as the project is substantially the same as the what investors provided to qualify their project. This makes these new incentives appropriate for Affordable Housing projects.

Federal Micro Purchase Limit Has Been Increased

If your organization receives federal funding and is subject to federal procurement standards, you should already have a policy in place. Those policies generally identify the different rules for different purchasing thresholds including micro purchases, simplified acquisitions and larger purchases. The micro purchase threshold was initially increased from $3500-$10,000 for all entities dealing with the Department of Defense. After the Office of Management and Budget increased the thresholds for transactions involving the National Defense Authorization Act, they issued a memo, OMB Memo M-18-18, which increased the simplified acquisition threshold for all nonfederal entities dealing with all federal agencies. Procurement responsibilities for the simplified acquisition threshold are the least restrictive. When the aggregate amount does not exceed the micro purchase threshold (now $10,000), nonfederal entities (that’s you!) must distribute micro purchases among qualified suppliers if practical. Micro purchases can be made without soliciting competitive quotations if you consider the price reasonable.

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.