The Impact of the Tax Cuts and Jobs Act on LIHTC Investments

by Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLP

The Tax Cuts and Jobs Act contains changes impacting the LIHTC Program


  • While the low-income housing tax credit program emerged largely unscathed, the reduction in corporate tax rates will reduce equity pricing.
  • Changes to Alternative Depreciation Rules for Real Property and the Business Interest Limitation will impact Non-Profits and LIHTC investors.
  • The new Basis Erosion Anti-Abuse Tax will discourage certain LIHTC investors having significant dealings with foreign affiliates.

The Tax Cuts and Jobs Act (the TCJA)1 was signed into law by President Trump on December 22, 2017. The TCJA makes sweeping changes to the Internal Revenue Code (the Code), several of which will have a significant impact on investments in low-income housing tax credit (LIHTC) projects.

The key items in the TCJA that will impact the LIHTC program are the following:

1.  Corporate Income Tax Rate Change. Section 13001 of the TCJA reduces the income tax rate imposed on corporations from 35 percent to 21 percent for taxable years beginning after December 31, 2017. While most corporations will greet this with the sound of corks popping from champagne bottles, this rate reduction will negatively impact the yield on existing LIHTC deals by reducing the value of post-2017 losses from 35 cents per dollar of losses to 21 cents per dollar (although the value of the LIHTC itself is unchanged—a dollar of tax credit is still worth a dollar).2 For future deals, the reduced value of tax losses will translate into reduced pricing from equity investors, which will require project developers to incur more permanent financing and/or defer larger amounts of developer fees.

2.  Real Property Depreciation Revisions. The TCJA leaves the cost recovery periods for residential and nonresidential real property unchanged; e., 27.5 years and 39 years, respectively. Under the alternative depreciation system, however, the cost recovery period for residential rental property is shortened from 40 years to 30 years. This will be helpful to LIHTC partnerships having a nonprofit entity as the general partner.

In the past, unless the investor was willing to accept that a significant portion of a project would be subject to 40-year depreciation, a partnership with a nonprofit general partner could not give that general partner an incentive management fee or any other type of fee or share of residual cash flow/capital proceeds that could be construed as a real or disguised share of profits.3 To qualify for 27.5-year depreciation in this circumstance, the nonprofit general partner would either have to accept annual fees that were fixed in amount or, alternatively, admit a wholly owned subsidiary as the general partner and make a Code Section 168(h)(6)(F) election. This latter alternative had several drawbacks, though. First, a consequence of the election is that any dividends or interest paid by the subsidiary to the nonprofit parent would constitute unrelated business taxable income, as would gain on the sale of the subsidiary’s stock. Second, in some jurisdictions providing property tax exemptions/abatements for LIHTC partnerships in which a nonprofit is the sole general partner or the managing general partner, this structure may not qualify for the exemption/abatement. Under the new law, with the consequence of having a portion of a project being treated as tax-exempt use property being limited to the difference between a 30-year and a 27.5-year recovery period, more flexibility can be shown in providing nonprofit general partners with fees similar to the fees paid to for-profit general partners.

The effective date of the new alternative depreciation system cost-recovery period is for real property that is placed in service after December 31, 2017. While the shortening of the cost recovery period for the alternative depreciation system for residential rental properties is generally beneficial, those partnerships placing projects in service after the effective date that had planned to elect 40-year depreciation to address capital account concerns will need to revisit their capital account analyses to see what might be done to avoid reallocations of anticipated tax benefits.

3.  100 Percent Expensing for Qualified Personal Property. Section 13201 of the TCJA amends Code Section 168(k) to provide for 100 percent expensing of qualified property placed in service after September 27, 2017 and before January 1, 2023.4 Qualified property is generally depreciable property having a recovery period of 20 years or less. The TCJA also extends this 100 percent expensing to the acquisition of certain property previously placed in service by other taxpayers.

4.  Limitation on Deductions for Business Interest Expense. Section 13301 of the TCJA amends Code Section 163(j) to impose a limitation on the amount of “business interest” that may be deducted in any taxable year. The limitation is calculated as an amount of business interest equal to the sum of (i) the business interest income of the taxpayer for the taxable year, (ii) 30 percent of the “adjusted taxable income” of the taxpayer for such taxable year (which may not be a negative amount) and (iii) the “floor plan financing interest” of the taxpayer for such taxable year.5 For this purpose, “business interest” is defined as any interest expense paid or accrued on any indebtedness that is properly allocable to the taxpayer’s trade or business, and expressly excludes investment interest expense. Similarly, “business interest income” is defined as interest income that is allocable to the taxpayer’s trade or business, and expressly excludes investment interest income.6 The calculation of “adjusted taxable income” changes several years after enactment of the TCJA. As an oversimplification, “adjusted taxable income” is essentially the taxable income of the taxpayer attributable to the trade or business in question determined without regard to deductions for depreciation, depletion and amortization. For taxable years beginning on or after January 1, 2022, “adjusted taxable income” is determined without excluding depreciation, depletion or amortization, which will result in a materially lower business interest limitation.

Four important concepts are worth noting here:

First, in the case of a taxpayer that is a partnership, the business interest limitation is determined at the partnership level, not at the partner level. Thus, the business interest deduction allowable at the partnership level is taken into account in calculating each partner’s share of the partnership’s non-separately stated income or loss, and each partner’s “adjusted taxable income” is thereafter determined without regard to its share of such non-separately stated income or loss, but is increased by such partner’s distributive share of the partnership’s “excess taxable income.” If any business interest of the partnership cannot be claimed by the partnership due to the business interest limitation, it is not carried forward by the partnership – instead, such excess business interest is allocated to each partner in accordance with its distributive share of the partnership’s non-separately stated income or loss, and is thereafter carried forward by each such partner. Thereafter, such carried forward business interest may only be offset by each such partner’s share of the partnership’s “excess taxable income.” For this purpose, “excess taxable income” of a partnership is the amount bearing the same ratio to such partnership’s adjusted taxable income as (A) the excess of (i) 30 percent of the partnership’s adjusted taxable income over (ii) the amount by which the business interest of the partnership (reduced by the floor plan financing interest, if any) exceeds the business interest income of the partnership bears to (B) 30 percent of the partnership’s adjusted taxable income. In short, excess business interest that is carried forward by a partner may be offset only against future income of the partnership to the extent that its adjusted taxable income in any future year exceeds the partnership’s business interest limitation.

Second, a taxpayer that operates a “real property trade or business” may make an irrevocable election to opt out of the business interest limitation. The consequence of such an election, however, is that all of the taxpayer’s residential rental property, nonresidential real property and qualified improvement property used in such real property trade or business must be depreciated using the alternative depreciation system. Code Section 469(c)(7)(C) defines a real property trade or business as “any real property development, redevelopment, construction, reconstruction,, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business.” Accordingly, the typical LIHTC partnership should qualify as eligible to elect out of the business interest limitation.

Whether the typical LIHTC partnership would actually need to make the election to preserve yield to the investors will have to be determined on a case by case basis. However, particularly given the tightening of the limitation on business interest that goes into effect beginning January 1, 2022, it is likely that investors in most future LIHTC projects will benefit from the election out, particularly given that the cost of such an election (i.e., increasing the project’s cost recovery period from 27.5 years to 30 years) is not significant.

In the case of an equity fund that invests in LIHTC partnerships, an election out of the business interest limitations would only be applicable with respect to interest on indebtedness incurred by the equity fund itself, such as bridge financing to meet operating-tier capital contribution obligations prior to the receipt of corresponding capital contributions from investors in the fund. However, it is not clear whether the interest on such indebtedness could be characterized as incurred in connection with a real estate trade or business, as the equity fund is not acquiring or operating real estate – it is acquiring interests in passthrough entities that own and operate real estate.

Third, Code Section 163(j)(3), as amended, exempts certain small businesses from the business interest limitation in the event that they meet the gross receipts test of Code Section 448(c). This test is satisfied if the corporation or partnership in question has average annual gross receipts of less than $25 million for the three previous taxable years (or such shorter period in which such corporation or partnership was in existence). However, the foregoing exclusion does not apply to an entity that is prohibited from using the cash method of accounting under Code Section 448(a)(3) due to its characterization as a “tax shelter.” For this purpose, a “tax shelter” includes a partnership in which more than 35 percent of its losses are allocated to limited partners under Code Section 1256(e)(3)(B). Accordingly, the gross receipts small business exemption will be unavailable to LIHTC partnerships.

Fourth, as previously mentioned, the election out of the business interest limitation by a LIHTC partnership will result in the partnership’s having to depreciate the project over the alternative depreciation system recovery period. For buildings placed in service after December 31, 2017, that recovery period is 30 years. For existing projects, however, it is not clear whether the applicable recovery period is the 30-year period provided in the TCJA or the 40-year recovery period in effect under prior law. There does not seem to be any policy reason that would compel different treatment for an electing LIHTC partnership with an existing building from an electing LIHTC partnership that places its buildings in service in 2018 (or within the same partnership if some buildings in a multiple building project are placed in service in 2017 and the rest in 2018). This would suggest that the 30-year recovery period enacted by the TCJA would make sense. Unfortunately, the conclusion that this result “makes sense” has no bearing on whether it is the intended or correct result under the statute.

Unfortunately, this is the point at which we wait with baited breath for the Internal Revenue Service to weigh in with definitive guidance.

5.  Base Erosion Anti-Abuse Tax (the “BEAT”). The TCJA adds new Code Section 59A, which imposes a “base erosion minimum tax” on certain taxpayers. The BEAT functions as a type of alternative minimum tax that takes account of tax benefits derived from payments to non-United States businesses or entities that are related to the taxpayer. The BEAT potentially applies to a taxpayer that is a corporation (other than an S corporation, a regulated investment company or a real estate investment trust) with average gross receipts over the prior three years of at least $500 million and whose “base erosion percentage” for the taxable year is 3 percent or higher. For this purpose, the “base erosion percentage” is equal to the “base erosion tax benefits” of the taxpayer for the taxable year over the aggregate amount of deductions available to the taxpayer under Chapter 1 of the Code for such taxable year. To simplify matters somewhat, a payment by a taxpayer to a foreign affiliate that may be deducted for U.S. federal income tax purposes gives rise to a base erosion tax benefit equal to such deduction. If the payment is made to acquire property, the base erosion tax benefit is an amount equal to the depreciation deduction that is available in the taxable year with respect to such property. Accordingly, if such deductions exceed 3 percent of the taxpayer’s aggregate deductions in a taxable year, the BEAT is potentially imposed on the taxpayer.7

The BEAT is an amount equal to 10 percent of the excess of the “modified taxable income” of the taxpayer for the taxable year over an amount equal to the taxpayer’s regular tax liability reduced (but not below zero) by a formula that has the effect of preserving the value of certain tax credits, including 80 percent of the taxpayer’s LIHTC.8 “Modified taxable income” is the taxpayer’s taxable income determined without regard to base erosion tax benefits and any deduction attributable to the base erosion percentage of any net operating loss of the taxpayer.

What does this mean? A taxpayer making material amounts of payments to foreign affiliates is currently at risk of losing up to 20 percent of the value of its LIHTC and, for taxable years beginning after December 31, 2025, the entire benefit of the LIHTC to such a taxpayer could be lost, as any LIHTC that is lost due to the BEAT cannot be carried forward. Accordingly, the BEAT could significantly and negatively impact the appetite of certain investors in the LIHTC equity market.

6.  Repeal of the Corporate Alternative Minimum Tax. Section 12001 of the TCJA repeals the corporate alternative minimum tax for taxable years beginning after December 31, 2017. While the corporate alternative minimum tax provisions of the Code had previously been amended to permit the LIHTC to offset alternative minimum tax liability, the complete repeal of the alternative minimum tax will be welcomed by corporate investors.

7.  Repeal of Partnership Technical Terminations. Bearing in mind that this is the time of year when Handel’s “Messiah,” and particularly the “Hallelujah Chorus,” enjoy considerable playing time on my beloved stereo, I note that the TCJA repeals the partnership technical termination provisions of Code Section 708(b)(1)(B) effective for taxable years beginning after December 31, 2017.9 This will avoid having to restart depreciation and file short taxable year returns in those circumstances in which a sale of an interest in a LIHTC partnership or equity fund would have otherwise caused a technical termination, and could lead to increased liquidity for such investments.

8.  Private Activity Bonds. The TCJA repeals the tax-exempt treatment of advance refunding bonds. The real story, though, is what the TCJA does not include. The House version of the TCJA provided for the elimination of tax-exempt private activity bonds. While this proposal created a windfall for dry cleaners who include bond lawyers and LIHTC professionals as among their clientele, the impact of this would have been disastrous for the LIHTC program.10 The LIHTC industry is quite grateful and relieved that this provision did not survive the Conference Committee.

9.  Chained CPI. Prior to enactment of the TCJA, many provisions of the Code, including certain LIHTC program items such as the annual credit ceiling and the volume cap on private activity bonds, were tied to an annual inflation adjuster determined with reference to the Consumer Price Index for All Urban Consumers, as calculated each year by the Department of Labor. Beginning for all taxable years after December 31, 2017, these inflation adjustments under the Code will be determined based upon the Chained Consumer Price Index for All Urban Consumers, which is expected to yield a somewhat more modest annual increment than the prior measure. Thus, the annual inflation-related increase in the credit ceiling (and other LIHTC program adjustments) will be more tempered in future years.

The author would like to thank Craig A. deRidder and Josephine S. Lo for their very helpful comments on earlier drafts of this Alert.

1.  Technically, due to last minute parliamentary (or, perhaps, Prince-ly) maneuvering, this is now the Act formerly known as the Tax Cuts And Jobs Act. For the sake of simplicity, this Alert will simply use the formerly appropriate “TCJA” acronym.

2.  Prior to President Trump’s election, it was not common for LIHTC deals to provide investors with change in law protection that would preserve yield in connection with a tax rate change. Once the White House and both houses of Congress became controlled by Republicans, the LIHTC market perceived a much greater likelihood of corporate tax rate reduction, with the result that more recent deals generally did feature pricing and/or other equity document concessions that contemplated this possibility.

3. Code Section 168(h)(6) provides that, subject to certain exceptions, if a partnership has a tax-exempt entity as a member, a portion of the property owned by the partnership equal to the nonprofit’s greatest share of income or gain of the partnership is treated as tax-exempt use property, subjecting that portion of real property owned by the partnership to 40-year depreciation.

4. Property placed in service after this sunset qualifies for first year bonus depreciation that is phased down through 2026 and is eliminated thereafter. Special rules also apply for property with a longer production time and for property placed in service after September 27, 2017 but acquired prior to September 28, 2017.

5. “Floor plan financing interest” is interest expense on indebtedness incurred in connection with acquiring inventory of motor vehicles for sale or lease and that is secured by such inventory. One would expect that this would not be relevant to a LIHTC partnership.

6. The Joint Explanatory Statement of the Committee of Conference of the TCJA states that the business interest limitation is intended to apply after other Code provisions that may require deferral or capitalization of interest. For example, if some portion of the accrued business interest of a partnership is required to be capitalized by Code Section 263A, such capitalization would take precedence over the business interest limitation.

7. The TCJA includes various exemptions that allow certain payments to be treated as not giving rise to a base erosion tax benefit, but drilling deeper into the details is both beyond the scope of this Alert and quite painful to endure.

8. For taxable years beginning after December 31, 2025, the tax rate is increased from 10 percent to 12.5 percent and the formula for tax credits is changed to eliminate any benefit from the LIHTC. For taxable years beginning in 2018, the tax rate is 5 percent rather than 10 percent.

9. Code Section 708(b)(1)(B) provided that a partnership would be terminated for federal income tax purposes if 50 percent or more of the interests in capital and profits were transferred within a twelve-month period.

10. At Novogradac and Company’s Tax Reform Resource Center website (, Mike Novogradac posted a blog (updated on November 8, 2017) estimating that more than 40 percent of all LIHTC projects are built utilizing financing from private activity bonds.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

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This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.