Specifically, I'm looking at a setup very much like what is described in This IRS Publication In fact, this wording in the IRS publication is effectively (similar, but a little different)what we are planning to do:
"Development Corp., a real estate developer, is a partner in a low-income housing partnership. The other partner is an investment partnership. Profits and losses are split 50/50, with the depreciation and low income housing credit specially allocated 99 percent to the investment partnership and 1 percent to Development Corp. The debt is recourse debt from an unrelated lender and both partners are general partners...."
The upshot is that project sponsors can trade the benefits of the Investment Tax Credit (ITC) created for initial capital on a dollar for dollar basis.
The question I have is: are there limitations to Profit/Loss/Capital (P/L/C) contributions? We plan to bring in one or more ITC partners, and offer ITC benefits independent from P/L/C on a negotiated basis. Our structure is an NC multi-member LLC that our other members are already familiar with. The Operating Agreement will spell out the splits. We would start with 0/0/0 and full ITC benefits, then add in what the ITC partner would want. If they want future depreciation expenses, we'd ID this in the OA. Our current membership has a lot of flexibility and variable allocation of P/L/C and ITC seems like a good plan.
To date we've only looked at this from a business perspective, not a tax perspective. I know many will say 'talk to your CPA', and we will, but it seems more effective to go in knowing what general parameters will 'fly' first. Love to hear your take on this @Steven Hamilton II
This is a popular strategy with some bigger developments and I have seen it used to great success by a group of clients. I was not involved in the planning and drafting process for these arrangements so I cannot comment much on the specifics.
My expectation would be that while there is a great degree of freedom in the allocation of income/deductions/credits the entire plan and operating agreement needs to be in conformance with the substantive economic effect tests (or relevant exceptions). Great amount of planning needs to go into it as negotiations need to be mindful of what kind of allocations are allowable or exempted by the code.
Thanks for the reply. I've been reading up on similar cases to our intended application and, indeed, there are some important tests to pass to having the IRS respect the allocation of credits. This part of tax code seems quite complex. I am aware I am out of my league. Our organizer (me) and current members want the project as leveraged as possible and we are only considering recourse debt. That seems to help in many cases I've read. I think our model will follow IRS requirements, but our plan is to engage a tax professional to see if there is a 'safe harbor' ruling that we can reference in our circumstances. I'll follow up as I catch more of a clue.
Make sure that both the attorney and CPA are working closely together. It is common to see operating agreements that are written by attorneys in a manner that violates the substantive economic effect tests. The CPA you engage needs to have a good understanding of these rules and preferably have experience handling these tax credit deals (it is a portion of the revenue code that is a bit less understood).
Chris I would be interested in looking at the tax credit partner role ....
I will definitely keep you in the loop. BTW this post pertains to two projects I have in the works. Both are qualified under IRS Form 3468 Part III, one pertaining to line items 11a (Qualified Rehabilitated Building) and the other 12b (Qualified Renewable Facility). The 12b project is much further along w/o any regulatory gating items. That's where I've been spending my energy;) Not the case with the rehab. The 12b is a 30% ITC federal w/o state support, but with on-going 8835 credits (Part II, line 13d)
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