March 31, 2011

Grants that low-income housing developers received from state housing agencies out of federal stimulus dollars under a so-called TCAP program—tax credit assistance program—had to be reported as income.

Congress gave the Department of Housing and Urban Development $2.25 billion in the economic stimulus bill in February 2009 to allocate among state housing agencies. The states then made awards to certain privately-owned low-income housing projects that still needed money to finish construction.

The IRS national office told its agents in the field in an internal legal memorandum made public in February that the grants must be reported as income. The memorandum is ILM 201106008.

The memo also addresses the timing of the income.

Grants received by developers who determine their incomes on a cash basis must report income once they have access to the funds in a state account from which to pay project costs. Larger developers that use accrual accounting must report income upon signing an agreement with the state housing agency fixing the amount of the grant the developer will receive.

These positions have no effect on Treasury cash grants paid on renewable energy projects under section 1603 of the stimulus. Congress made clear when it authorized the renewable energy grants that they do not have to be reported as income.

Many renewable energy projects are owned by limited liability companies treated as partnerships. Even though section 1603 payments are exempted from taxes, their receipt still has an effect on partner capital accounts that determine, among other things, how much depreciation a partner can absorb from a project. A partnership receiving a grant treats it as tax-exempt income. Tax-exempt income increases the partner capital accounts. This gives partners more capacity to absorb depreciation from a project.

The timing of when this income bumps up capital accounts is unclear. Because of the uncertainty, tax equity investors would be wise still to invest in partnerships that own projects on which section 1603 payments will be made before the projects are placed in service to ensure they are partners before the bump up in capital accounts occurs.