by Ron Diner, Raymond James Tax Credit Funds, Inc.
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In January, I wrote on the simple accounting change that could attract more investment to affordable housing: moving the cost and benefits of the Housing Credit to the same side of the tax line. Just two months later, that long-awaited change is looking closer to becoming a reality.
The Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) discussed the matter in a March 14 meeting, The EITF reached a consensus-for-exposure to allow public companies to report both the costs and benefits of the Low Income Housing Tax Credits on the tax line, essentially agreeing with the June 2012 white paper prepared by the Raymond James-led task force comprising syndicators, investors and others. (The paper was prepared by Mike Beck of CohnReznick and Bentley Stanton ofNovogradac & Company.)
Although we are not over the goal line, it would seem that we are close. Based on the comments at the meeting and the overall direction the EITF seems to be heading, this is a very positive development. The proposed change would allow what is called “effective yield accounting” without a guarantee requirement, which would ensure that both the deductions and the tax credits generated by federal income tax credit investments are recorded below the line as part of a company’s income tax expense. It would enhance the accounting for affordable housing investments, eliminate a concern of both current and prospective investors and almost certainly increase the flow of capital to affordable housing.
The revised criteria to apply the effective yield method, subject to certain edits (which are not anticipated to be material), generally would require that:
(a) It is probable that the tax credits allocable to the investor will be available
(b) The investor does not participate in the operation of the investment, and substantially all of the projected benefits are from the tax credits and other tax benefits;
(c) The investor’s expected return is positive, based solely on the cash flows from the tax credit and other tax benefits; and
(d) The investor holds a limited interest (LLP or LLC) in the affordable housing project for both legal and tax purposes, and the investor’s liability is limited to its capital investment.
The proposed guidance is expected to be applied retrospectively, with early adoption permitted. (For LIHTCs that do not meet the criteria, the investment would be accounted for as either an equity investment or cost-method investment.)
The next step is that EITF staff will create and publish an exposure draft for public comment. The exposure draft is expected in mid-April.
Based on the discussion in the meeting, application of the proposed consensus would be limited to LIHTC programs. However, the exposure document will solicit feedback through comment letters about whether other tax credit programs may also meet the proposed criteria to apply the effective yield method.
After public comment is gathered, the EITF will hold another meeting to discuss that feedback and consider additional modifications to the proposal. Once the process has been completed, the EITF will finalize its recommendations and submit them to the FASB for final approval. In the best-case scenario, a final rule would be adopted in mid-September.
Ronald Diner is Executive Chairman at Raymond James Tax Credit Funds, based in St. Petersburg, Florida. Raymond James has been sponsoring affordable housing since 1969, and has raised more than $4 billion in equity for more than 1,300 properties across the country since the inception of the Tax Credit program in 1986.