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Video instructions and help with filling out and completing When 8850 Form Taxpayer

Instructions and Help about When 8850 Form Taxpayer

So you have a company that's been successful and has generated a lot of revenue over the years when you generate lots of revenue that means you owe the IRS a lot of taxes so as part of the 1986 Tax Reform Act Congress created section 42 of the Internal Revenue Code otherwise known as the low income housing tax credit under this low income housing tax credit program this company can contribute capital to or invest in affordable housing projects that will enable low income families to live in quality housing while paying less than the fair market rent in return for contributing this capital the company is able to claim tax credits that will reduce its federal income tax liability now obviously the present value of the reduction in tax liability needs to be greater than the capital contributed for the program to be worthwhile to the investor company so how exactly though does the program work what are the mechanics let's talk about those first of all even though the tax credits offset federal tax liability the responsibility for administering the program is actually delegated to state housing agencies we use Oklahoma for our example as defined in the code each state receives a pool of tax credits based on the population of the state so in 2022 the population of Oklahoma is approximately three point six seven million people there is a factor by which the states multiply their population to identify their tax credit pool for the year in 2022 that factor is two dollars and ten cents three point six seven million times two dollars and ten cents equals approximately seven point seven million dollars in low-income housing tax credits to be awarded to real-estate partnerships that apply for these tax credits the tax credits will be awarded according to each state's qualified allocation plan or qap although there are differences in each state's qap so they can award credits according to the specific needs of their particular state federal legislation and other guidance specify that certain provisions of the Q ApS will be common to all of the states here's an example of a developer who has in mind constructing a to building affordable housing project so part of his tax credit application is to perform a calculation on how many tax credits he believes his project will generate in this example we've got two buildings and each building earns tax credits independent of the other and we're saying that the developer calculates that one building is going to earn $250,000 in tax credits per year and the other is going to earn 200,000 in tax credits per year so in this example building a is far smaller than building B it's only two point seven eight million dollars instead of five point five six million dollars but the fraction or portion of low-income units for building a is going to be a hundred percent and for building B it's going to be only forty percent so in this example building a will have a qualified basis of approximately two point seven eight million dollars but building B will have a qualified basis of only approximately 2.2 million dollars you multiply the qualified basis amount for each building by the tax credit percentage of nine percent now we generate annual tax credits for these buildings of the 250,000 and the two hundred thousand which are the amount the developer will include the application is submits the State Housing Agency the developer submits the application to the State Housing Agency after having taken into account the provisions of the qualified allocation plan of course and if the state agency likes the application it will reserve from the total credit pool the amount of credits this applicant requested so in our example with Oklahoma this developer gets a four hundred fifty thousand dollar credit reservation out of the total seven point seven million dollar pool available with the developer receiving a reservation of credits and meeting some preliminary benchmarks the investor now joins the deal either directly as a limited partner or through some kind of a managed fund and begins to contribute capital to the partnership if the developers maximizing the amount of tax credits the project can generate will this amount of capital that the investor will pay for the ability to claim those credits will cover a majority of the construction costs in the project most in most cases think about this from the standpoint of the developer because of and through the low-income housing tax credit program a developer is able to finance the majority of construction costs per project through investors equity with the needed funds available the contractors and other parties service providers build the buildings but the buildings can't be leased up until they are deemed suitable for occupancy this is where a city inspector will come out to the site and issue upon inspection what is called a certificate of occupancy one for each building once the project receives certificates of occupancy it's the property manager who is tasked with leasing up the units to tenants including low income qualified tenant having placed the buildings in service and initially leasing up the specially set-aside units to low-income households the partnership will want to start claiming the tax credits to do this the partnership must submit a placed in service package to the State Housing Agency the placement service package is essentially a mountain of proof showing that the partnership actually did do everything it said it was going to do in the original application so the State Housing Agency will want copies of the certificates of occupancy and also loan documents architectural agreements permits and probably most importantly an audit of the actual final construction costs to see that those costs match those presented in the original tax credit calculation within the application the developer sends the placed in the service package to the state agency.

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