2018 - Novogradac Tax Reform Resource Guide

Novogradac
Special Reports
2018
Novogradac
TAX REFORM
RESOURCE GUIDE
Novogradac & Company LLP
Novogradac
Special Reports
2018
Novogradac
TAX REFORM
RESOURCE GUIDE
Cover Photo: Courtesy of Christian Phillips Photography

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©2018 Novogradac & Company LLP. All Rights Reserved.
ISBN #978-0-9993308-2-1
About the Firm
Novogradac & Company LLP is a national certified public accounting and consulting
firm headquartered in San Francisco with offices in San Rafael, Walnut Creek and
Long Beach, Calif.; Dover, Columbus and Cleveland, Ohio; Austin, Dallas and El Paso,
Texas; Andover and Boston, Mass.; Toms River and Iselin, N.J.; St. Louis; New York;
Chicago; Portland, Ore.; Naples, Fla.; Raleigh, N.C.; and the greater metropolitan
areas of Philadelphia; Washington, D.C.; Atlanta; Detroit; Kansas City, Mo.; and
Seattle. Specialty practice areas include tax, audit and consulting services for tax-
credit-assisted affordable housing, community revitalization, rehabilitation of historic
properties and renewable energy. Other areas of expertise include business valuation,
preparation of market studies, appraisals and other analyses of multifamily housing
investments and renewable energy tax credit developments.
Novogradac & Company LLP offers assistance with specific issues as well as broader
guidance with tax credit developments. The firm’s 25-plus years in business give
it unique insight into the issues that matter most. Novogradac’s services and
solutions are based on innovative thinking and effective implementation and are
the foundation on which the firm has developed the critical resources necessary to
provide outstanding professional services. Novogradac is dedicated to meeting client
needs in a thorough, efficient and creative manner.
The firm also specializes in the education of these technical tax credit issues.
Novogradac & Company partners have published numerous affordable housing
industry related articles in national newspapers and highly regarded trade journals.
Every year Novogradac offers nearly a dozen tax credit conferences across the
country. The firm also conducts workshops and webinars on a variety of affordable
housing, new markets and renewable energy related topics. Because of their industry
expertise, Novogradac professionals are invited regularly to speak at seminars and
conferences throughout the country. The firm is also invested in the future, heading
up working groups to advocate in the various industries in which it operates.

www.novoco.com v
About the Authors
Michael Novogradac is the managing partner of Novogradac & Company LLP. He
has more than 30 years of experience specializing in affordable housing, community
development, historic preservation and renewable energy. Mr. Novogradac’s focus
is in real estate taxation and accounting. He is the author of numerous real estate-
related tax and accounting articles and books, including the Novogradac New
Markets Tax Credit Handbook and the Low-Income Housing Tax Credit Handbook.
A frequent speaker at tax credit conferences and forums throughout the country,
Mr. Novogradac is very active in advocating for the inclusion of affordable housing,
historic, new markets and renewable energy tax credits in federal and state policy and
broadcasts a weekly podcast that focuses on tax credit issues.
Tom Boccia is a partner in the Cleveland office of Novogradac & Company LLP,
where he specializes in community development, including historic rehabilitation
tax credit (HTC), new markets tax credit (NMTC) and low-income housing tax credit
(LIHTC) transactions. Mr. Boccia has more than 30 years of public accounting
experience providing audit, tax and consulting services.
Thomas Boman is a partner in the St. Louis office of Novogradac & Company LLP.
He joined the St. Louis office in 2013 as a tax partner. Before joining the firm, he
served as a senior vice president of tax for a private equity firm in St. Louis. He has
more than 30 years of experience as a tax consultant to a variety of companies with
a focus on pass-through entities. Mr. Boman has significant experience with the new
markets tax credit (NMTC) at both the federal and state levels.
Roy Chou is a principal in the San Francisco office of Novogradac & Company
LLP. Mr. Chou has experience in real estate, affordable housing, and community
development, including new markets tax credit (NMTC) and historic rehabilitation
tax credit (HTC) transactions. He has worked extensively on financial projections
models and forecasts, financial statement audits, and tax return preparation.
Brad Elphick is a partner in the metro Atlanta office of Novogradac & Company
LLP. He has extensive experience in the low-income housing tax credit (LIHTC),
historic tax credit (HTC) and new markets tax credit (NMTC) programs. Mr.
Elphick specializes in developer consulting, with an emphasis in forecasting and
vi 2018 Novogradac Tax Reform Resource Guide

partnership taxation. He also works extensively with real estate partnership audits
and compliance audits, as well as the structuring of LIHTC and NMTC applications.
Nat Eng is a partner in the San Francisco office of Novogradac & Company LLP,
where he focuses on renewable energy transactions across a variety of technologies
including solar, wind and battery storage. He works with numerous renewable energy
developers/sponsors, syndicators and investors by providing accounting, consulting
and transaction advisory services.
Tony Grappone is a partner in the Boston office of Novogradac & Company

LLP, where he specializes in providing accounting, tax and consulting services
to developers, syndicators and investors of developments that qualify for federal
and state tax credits such as the low-income housing tax credit (LIHTC), historic
rehabilitation tax credit (HTC), new markets tax credit (NMTC) and renewable
energy tax credits (RETCs).
Michael Kressig is a partner in the St. Louis office of Novogradac & Company LLP,
where he specializes in community development and affordable housing, including
new markets tax credit (NMTC), low-income housing tax credit (LIHTC) and historic
rehabilitation tax credit (HTC) transactions. He has more than 25 years of public
accounting and business advisory experience.
Peter Lawrence is Novogradac & Company’s director of public policy and

government relations. He has worked on policy and advocacy, with a focus on the
low-income housing tax credit (LIHTC), new markets tax credit (NMTC), historic
rehabilitation tax credit (HTC) and renewable energy investment tax credit (ITC) and
production tax credit (PTC). He is a frequent speaker at industry events and writes an
occasional column for the Novogradac Journal of Tax Credits as well as posts for the
Notes from Novogradac blog.
George Littlejohn is a partner in the Austin, Texas, office of Novogradac &

Company LLP. Mr. Littlejohn specializes in commercial real estate development,
with an emphasis in affordable housing. He has extensive experience in the low-
income housing tax credit (LIHTC), the historic rehabilitation tax credit (HTC)
and tax-exempt bond financed transactions, including those subject to the auditing
requirements of the U.S. Department of Housing and Urban Development (HUD).

www.novoco.com vii
Nicolo Pinoli is a partner in the Portland, Ore., office of Novogradac & Company
LLP, where he specializes in affordable housing and community development,
including the low-income housing tax credit (LIHTC), new markets tax credit
(NMTC), historic rehabilitation tax credit (HTC) and tax-exempt-bond-financed
transactions.
John Sciarretti is a partner in the Dover, Ohio, office of Novogradac & Company
LLP, where he specializes in the real estate finance, community development and
renewable energy industries. Mr. Sciarretti has extensive financial experience
working with businesses, including more than 20 years in public accounting and
four years as an executive financial manager. Mr. Sciarretti specializes in the historic
rehabilitation tax credit (HTC), new markets tax credit (NMTC) and the renewable
energy credit (RETC).
Daniel Smith is a partner in the Dover, Ohio, office of Novogradac & Company LLP.
Mr. Smith has more than 20 years of experience in affordable housing, community
development and renewable energy, assisting developers and investors in maximizing
the benefits of low-income housing tax credits (LIHTCs), historic rehabilitation tax
credits (HTCs) and renewable energy tax credits (RETCs).
Stephen Tracy is a tax partner in the San Francisco office of Novogradac &
Company LLP. He serves clients extensively in the renewable energy and real estate
industries where he specializes in providing transaction advisory, accounting, tax
and consulting services in connection with projects that qualify for federal energy
investment tax credits (ITC), production tax credits (PTC), historic rehabilitation tax
credits (HTC) and low-income housing tax credits (LIHTC).
Dirk Wallace is a partner in the Dover, Ohio, office of Novogradac & Company
LLP. Mr. Wallace has extensive experience in developer consulting and real estate
syndication with an emphasis in real estate partnership audit and taxation. He is
experienced in affordable housing developments and specializes in the low-income
housing tax credit (LIHTC), including properties financed through NAHASDA, and
U.S. Department of Housing and Urban Development (HUD) Sections 221(d)(4) and
223(f) loan programs.
viii 2018 Novogradac Tax Reform Resource Guide

Acknowledgments
We would once again like to thank all of those involved in the preparation of the
2018 Novogradac Tax Reform Resource Guide. Without their contributions, this
handbook would not be the valuable tool that it has become.
We are grateful to our associates at Novogradac & Company LLP for all of their
time and effort on behalf of this resource guide. Particular gratitude goes to
Karen Destorel, Brad Stanhope, Jesse Barredo and Elizabeth Orfín.
www.novoco.com

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Table of Contents
About the Firm v
About the Authors vi
Acknowledgments ix
I. Overview 1
II. General Tax Changes 3
A. General Business Tax Changes 3
1. Cost Recovery Changes 3
a) Section 179 Expensing 3
b) 100 Percent Bonus Depreciation 6
c) Real Property Depreciable Life 7
2. Business Interest Expense Limitation 9
3. Certain Special Rules for Taxable Year of Inclusion 16
4. Modifications of Gross Receipts Test for Use of Cash Method of
Accounting by Corporations and Partnerships 19
5. Partnership Interest for Services 20
6. Change to Chained CPI 22
B. Corporate Tax Changes 25
1. Corporate Tax Rate 25
2. Repeal of Corporate Alternative Minimum Tax 26
3. Base Erosion and Anti-Abuse Tax (BEAT) 26
C. Noncorporate Tax Changes 29

1. Provisions Affecting Partners and Partnerships 29
a) Special Deduction for Qualified Business Income 30
b) Changes to Substantial Built-In Loss Basis Adjustments 33
c) Basis Adjustments for Partnership Charitable
Contributions and Foreign Taxes 34
x 2018 Novogradac Tax Reform Resource Guide

d) Changes to Technical Terminations of Partnerships 34
2. Individual 35
a) Income Tax Rates 35
b) Limitations on Deducting Business Losses 38
c) Alternative Minimum Tax–Increased Exemption 39
III. Low-Income Housing Tax Credit 41

A. Volume Cap LIHTCs 41
B. Private Activity Bonds 41
C. Acquisition/Rehabilitation Projects 42
D. Effect to Low-Income Housing Tax Credit from other
Amendments in P.L. 115-97 43
1. Reduced Corporate Tax Rate 43
3. Business Interest Limitations 45
4. Alternative Depreciation System Lives 48
5. Bonus Depreciation 50
6. Repeal of Technical Terminations 51
7. Year of Inclusion for Gross Income 52
8. Taxability of Nonshareholder Contributions to Capital 53
IV. Historic Tax Credit and

Non-Historic Rehabilitation Tax Credit 55
A. Statutory Changes to Section 47 55
1. Repeal of 10 Percent Rehabilitation Tax Credit 55
2. Modification to 20 Percent Historic Rehabilitation Tax Credit 56
3. Transition Rule 59
B. Effects to Historic Tax Credit from other
1. Modifications to Section 179 Rules for Election to Expense Certain
Depreciable Business Assets 61

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2. Modifications to Depreciation Rules 62
3. Modifications to Business Interest Deductions 64
V. New Markets Tax Credit 70

A. Statutory Changes to Section 45D 70
B. Effects to New Markets Tax Credit from other
1. Reduced Corporate Tax Rate 71
2. Base Erosion and Anti-Abuse Tax 71
3. Business Interest Expense Limitations 73
4. Elimination of Partnership Technical Terminations 75
VI. Renewable Energy Tax Credits 76

A. Statutory Changes to Renewable Energy
Tax Credit Provisions 76
B. Effects to Renewable Energy Tax Credits from other
1. Orphaned Technologies 77
2. Effect of Lower Corporate Tax Rate 77
3. Bonus Depreciation 79
4. Interest Deduction Limitation 81
6. Repeal of Corporate AMT 85
7. Repeal of Partnership Technical Terminations 85
8. Statutory Changes to Net Operating Losses–
Repeal of Net Operating Loss Carryback 86
9. P.L. 115-97 Statutory Changes to Recognition of Prepayments 87
10. Impact of Pass-through Deduction for Individuals 88
11. RETC Investor GAAP Impacts 89
a) Deferred Tax Assets and Liabilities 89
xii 2018 Novogradac Tax Reform Resource Guide

b) Impairment Considerations 89
c) Hypothetical Liquidation at Book Value Calculations 90
VII. Opportunity Zones 92

A. Overview 92
B. Designation of Qualified Opportunity Zones 93
C. Gains Invested In Opportunity Zones 95
1. Temporary Gain Deferral 95
2. Long-Term Investment Incentives 97
3. Qualified Opportunity Funds 98
4. Qualified Opportunity Zone Property 99
5. Qualified Opportunity Zone Business 101
VIII. Conclusions 103

IX. Index 105
X. Appendix/Reference Documents 108
A. Comparison Chart 108
B. P.L. 115-97 of 2017 110
C. Relevant Sections of Internal Revenue Code 112
D. Relevant Sections of the Conference
Report to Accompany H.R. 1 114
E. Relevant Sections of the Joint Explanatory
Statement of the Committee of Conference 114

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Overview I
I. Overview
Tax reform legislation passed in December 2017–commonly known as the Tax
Cuts and Jobs Act or H.R. 1–was a sweeping overhaul of the United States tax
code. The bill was enacted Public Law No. 115-97 (P.L. 115-97) and represents
the first major reform since 1986. This resource guide describes and assesses
direct and indirect implications of P.L. 115-97 on tax credits and related areas of
interest. The major reported goals of the law are to:
Lower tax rates for businesses by:
• reducing the corporate tax rate from 35 to 21 percent,

• reducing the rate for pass-through businesses
• providing other pro-growth measures
Simplify and reform rates, standard deductions and exemptions for

individuals by:
• providing a larger standard deduction and child tax credit,

• increasing the exemption threshold for estate tax,
• repealing and reforming a number of credits and deductions, most
importantly state and local taxes (SALT)
Move toward a territorial system of taxation where primarily income earned in

the U.S. is taxed, as opposed to the current system where worldwide income is
subject to taxation.
The first part of this guide addresses changes that affect the tax environment
within which various tax-incented public private partnerships operate. The
following parts discuss specific targeted tax incentives.
Five major tax incentive areas are specifically addressed:
• Low-income housing tax credit (LIHTC)

• Historic tax credit (HTC) and non-historic rehabilitation tax credit
• New markets tax credit (NMTC)

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I Overview
• Renewable energy tax credits (RETCs)

◦◦ Investment tax credit (ITC)
◦◦ Production tax credit (PTC)
• Opportunity zones
This guide is not intended to be and is not a complete analysis of P.L. 115-97 and
its effects on taxpayers. It is intended to be a review of provisions critical to the
tax-incented public private partnerships.
2 2018 Novogradac Tax Reform Resource Guide

General Tax Changes II
II. General Tax Changes

This section details those amendments and additions to the tax code introduced
by P.L. 115-97 that are general in nature and sorted into one of three categories:
general business tax changes; corporate tax changes; and, changes that affect
noncorporate taxpayers. Each of the changes detailed here are expected to have
a direct or indirect effect on the major tax credits and incentives offered through
the tax code. The five major tax credits and incentives–LIHTC, HTC, NMTC,
RETC and opportunity zones–will be discussed at length later in this guide and
will refer back to the changes detailed here.
A. General Business Tax Changes

The sections of the tax code affected by the provisions of P.L. 115-97 addressed
here cover a range of entities and rules.
1. Cost Recovery Changes
P.L. 115-97 intends to improve investment through changes to how businesses

recover costs. This includes increasing limitations on deductions, increasing
and extending bonus depreciation rules, and updating the depreciable lives
of real property. This section will look at several areas of cost recovery
changes in detail.
a) Section 179 Expensing
Tax law has long allowed small businesses that meet certain criteria to deduct
fixed-asset additions (often referred to as 179 deductions), up to certain
thresholds. P.L. 115-97 increased the limitation on 179 deductions from
$500,000 per year to $1 million per year.1
1 IRC Section 179(b)(1), as amended by Section 13101(a)(1) of P.L. 115-97.

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II General Tax Changes
However, the availability of 179 deductions are subject to phaseouts based on

the amount of qualifying 179 property acquired during the tax year, as well as
other limitations. P.L. 115-97 revised the amount of qualifying 179 property
acquired during the tax year at which the phaseout begins. Under prior law,
the 179 phase out began at $2 million, but was increased beginning in 2018
to $2.5 million.2 For qualifying 179 property placed in service during the tax
year, the allowable 179 deduction is reduced dollar for dollar by any amounts
exceeding the phaseout threshold. This effectively means that taxpayers with up
to $2.5 million in qualifying 179 property are eligible to claim the full $1 million
179 deduction, taxpayers placing in service from $2.5 million to $3.5 million
in qualifying 179 property are eligible to claim a reduced amount of the 179
deduction and taxpayers placing in service $3.5 million or more in qualifying
179 property will be ineligible to claim any 179 deduction. In addition to this
limit, other limitations and provisos also apply to 179 deductions.
Particularly noteworthy is that the phaseout limitations based on the amount

of qualifying 179 property acquired during the tax year are imposed at both
the partnership level and at the partner level.3 Therefore, for large corporate
investors with large amounts of qualifying 179 property at the corporate level
that also own multiple partnerships with their own qualifying 179 property, it
is overwhelmingly likely that in any given year, the $3.5 million threshold will
be reached, which would effectively eliminate the ability of the investor to claim
any 179 deductions, and for the partnerships which they own, an allocation of
179 deductions to the investor would be fruitless because those deductions could
not be used by the investor.
Both the maximum deduction and the phaseout amount are

indexed for inflation.4
Section 179 deductions have also been extended, at the election of the taxpayer,
to include qualified real property.5 Although buildings themselves do not
qualify for 179 deduction treatment, qualified real property includes a list of
items that would otherwise be depreciated with the building, but will now be
2 IRC Section 179(b)(2), as amended by Section 13101(a)(2) of P.L. 115-97.
3 IRC Section 179(d)(8).
4 IRC Section 179(b)(6)(A), as amended by Section 13101(a)(3) of P.L. 115-97.
5 IRC Section 179(d)(1)(B), as amended by Section 13101(b)(1) of P.L. 115-97.

depreciated as distinct depreciable assets. Qualified real property includes

qualified improvement property,6 which are improvements to nonresidential
real property placed in service after the original property was first placed in
service. In addition to qualified improvement property, additional improvements
to nonresidential real property made after the building is first placed in service
also qualify for the 179 deduction and include roofs; heating, ventilation and air
conditioning property; fire protection and alarm systems; and security systems.7
Finally, residential rental property has long been ineligible for 179 deductions
due to a provision in prior law that excluded property used for dwelling from
claiming 179 deductions.8 However, P.L. 115-97 eliminated this restriction,
thereby allowing certain property owned by residential rental property owners
to qualify for 179 deductions.9
For property owned by a business operating residential rental property, only

certain property qualifies for the 179 deduction. To qualify, the property must
be tangible property used in the active conduct of a trade or business, and
must be classified as personal property.10 Therefore, only a relatively small
subset of the assets used in the residential rental business will be eligible for
the 179 deduction.
Section 179 deductions are also subject to a limit equal to the amount of taxable
income generated by the taxpayer in the conduct of any trade or business.11
However, carryover provisions do provide that any deductions not taken in the
current year due to insufficient taxable income may be carried forward to future
years.12 For many taxpayers engaged in a real estate trade or business, due to
depreciation deductions that dramatically reduce the taxpayer’s taxable income,
this limitation is likely to severely limit their ability to claim 179 deductions.
6 IRC Section 179(f)(1), as amended by Section 13101(b)(2) of P.L. 115-97. Qualified improvement property is
described in IRC Section 168(e)(6).
7 IRC Section 179(f)(2), as amended by Section 13101(b)(2) of P.L. 115-97.
8 The last sentence of IRC section 179(d) (prior to the enactment of P.L. 115-97) identified that Section 179 property
did not include property described in Section 50(b). IRC Section 50(b)(2), in turn, identified that this property
included property used for lodging, effectively rendering residential real estate owners ineligible to claim the 179
deduction.
9 Section 13101(c) of P.L. 115-97.
10 IRC Section 179(d)(1) and, by reference, IRC Section 1245(a)(3).
11 IRC Section 179(b)(3)(A).
12 IRC Section 179(b)(3)(B).

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The above revisions addressing changes to the 179 deduction provisions apply to
property placed in service for taxable years beginning after Dec. 31, 2017.13
b) 100 Percent Bonus Depreciation
The bonus depreciation rules have been increased and extended.14 Before P.L.
115-97, bonus depreciation was capped at 50 percent, but is now increased to
100 percent for qualifying property placed in service after Sept. 27, 2017, and
before Jan. 1, 2023. After that, bonus depreciation is phased down, based on the
following dates:
PLACED IN SERVICE APPLICABLE PERCENTAGE
After Dec. 31, 2022 before Jan. 1, 2024 80 percent

Certain qualified property with a longer production period would gain an

additional year from the dates shown above.15
Property qualifying for bonus depreciation was largely undisturbed by P.L.

115-97. The one exception is the change to allow used property to qualify for
bonus depreciation.16 Previously, only brand-new property qualified for bonus
depreciation.17 To qualify for bonus depreciation, property must be depreciable
and have a recovery period of 20 years or less.18 Therefore, although there were
various proposals during the drafting process for P.L. 115-97 which would have
permitted buildings to be eligible for 100 percent bonus depreciation, buildings
continue to not be eligible for bonus depreciation. The exception to this rule
is that real property classified as qualified improvement property is eligible
13 Section 13101(d) of P.L. 115-97.

14 Section 13201 of P.L. 115-97.
15 IRC Section 168(k)(6)(B), as amended by Section 13201 of P.L. 115-97.
16 IRC Section 168(k)(2)(A)(ii) and 168(k)(2)(E)(ii), as amended by Section 13201(c) of P.L. 115-97.
17 IRC Section 168(k)(2)(A)(ii), as existed prior to the passage of P.L. 115-97.
18 IRC Section 168(k)(2)(A).

for bonus depreciation.19 Finally, property depreciated using the alternative

depreciation system (ADS) is not eligible for bonus depreciation.20
For taxpayers desiring to either avoid or reduce their bonus depreciation,

elections are available. First, an election is still available to elect out of bonus
depreciation entirely.21 This election is made separately for each class of
depreciable assets.22 Additionally, a new election is available to apply 50 percent
instead of 100 percent. However, the election to use 50 percent in lieu of 100
percent is only available for property placed in service during the first taxable
year ending after Sept. 27, 2017.23
Somewhat intriguingly, the details around the election to apply 50 percent

instead of 100 percent appears to be a rather blunt tool. Whereas elections
for bonus depreciation have previously been available on an asset class-by-
class basis, the election to use 50 percent instead of 100 percent appears to
be a blanket election that would apply to all of the bonus depreciation eligible
property placed in service between Sept. 27, 2017 and Dec. 31, 2017.24
c) Real Property Depreciable Life
Although P.L. 115-97 left the depreciable lives under the general depreciation
system (GDS) for real property unchanged, it updated depreciable lives under
the ADS. The ADS life for qualified improvement property is 20 years25
(previously undefined), and the ADS life for residential rental property is 30 years26
19 IRC Section 168(k)(2)(A)(i)(IV).

20 IRC Section 168(k)(2)(D).
21 IRC Section 168(k)(7).
22 IRC Section 168(b)(5).
23 IRC Section 168(k)(10)(A), as amended by Section 13201(d) of P.L. 115-97.
24 IRC Section 168(k)(10)(A), as amended by Section 13201(d) of P.L. 115-97. Contrast the language in this
provision, which includes no mention of a class-by-class election, to the language in IRC Section 168(k)(7), which
specifically provides for that election to be made with respect to any class of property for any taxable year.
25 IRC Section 168(g)(3) as amended by Section 13204(a)(3)(B) of P.L. 115-97. Note that P.L. 115-97 intended that
168(g)(3) would identify qualified improvement property as 20-year property for ADS purposes by reference
to qualified improvement property included in IRC Section 168(e)(3)(D)(v), but IRC Section 168(e)(3)(D)(v) was
inadvertently omitted during the legislative drafting process. A technical correction or additional guidance
may be needed to correct this error in the statute. Absent a technical correction, the ADS life for qualified
improvement property will be 40 years.
26 IRC Section 168(g)(2)(C), as amended by Section 13204(a)(3)(C) of P.L. 115-97.

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(previously 40 years). The ADS life for nonresidential real property remains
unchanged at 40 years.
Before the enactment of P.L. 115-97, separate definitions and treatment existed
for qualified leasehold improvement property, qualified restaurant property
and qualified retail improvement property. Under P.L. 115-97, these categories
are eliminated and replaced with a new category called qualified improvement
property (QIP).27 Based on the conference report, QIP should have a 15-year
recovery period28 and use the straight-line method of depreciation.29 However,
due to a drafting omission in P.L. 115-97, the recovery period for QIP was not
defined, which leaves this class of property in limbo and could result in a 39-
year recovery period.30
QIP includes any improvement to an interior portion of a building that is

nonresidential real property if the improvement is placed in service after the
date the building was first placed in service.31 However, QIP does not include
improvements related to enlargement of the building, elevators or escalators, or
the internal structural framework of the building.32
In a new twist, for real estate businesses, P.L. 115-97 introduces an interplay
between the depreciation rules and the deductibility of interest expense. As
outlined in section II.A.2 of this guide, Business Interest Expense Limitation,
P.L. 115-97 introduces a new limitation on business interest deductions.
However, entities engaged in a real property trade or business33 may elect out
of the limitation on business interest expense.34 Any entity that makes this
27 Section 13204(a)(1) of P.L. 115-97., and IRC Section 168(e)(6), as amended by Section 13204(a)(4)(B) of P.L. 115-
97.
28 P.L. 115-97 inadvertently omitted the change to the statute to include qualified improvement property in the
15-year recovery period. The conference report does specify that a 15-year recovery period is intended to apply
to qualified improvement property. A technical correction or additional guidance may be needed to correct this
omission from in the statute.
29 IRC Section 168(b)(3)(G), as amended by Section 13204(a)(2)(B) of P.L. 115-97.
30 Treasury has suggested in informal comments that it lacks the regulatory ability to impose the 15-year recovery
period, notwithstanding the clear legislative intent outlined in the conference report. As qualified improvement
property relates to building improvements for nonresidential real property, 39 years would be the logical
recovery period in lieu of a shorter life that was intended to be memorialized in the statute.
31 IRC Section 168(e)(6)(A), as amended by Section 13204(a)(4)(B) of P.L. 115-97.
32 IRC Section 168(e)(6)(B), as amended by Section 13204(a)(4)(B) of P.L. 115-97.
33 IRC Section 469(c)(7)(C) defines a real property trade or business as any property development, redevelopment,
construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage
trade or business.
34 IRC Section 168(g)(1)(F), as amended by Section 13301 of P.L. 115-97.

election must use the ADS recovery period for all nonresidential real property,
residential rental property and QIP.35 As an added wrinkle to the election and
using the ADS recovery period, property depreciated using ADS lives is not
eligible for bonus depreciation.36
The interplay between the depreciation provisions and the interest deduction
limitation provisions will likely lead to the need for careful evaluation and
modeling of the relative merits and returns associated with the selection of
either option. The increase in interest deductions by making the election will
lead to depreciation deductions being claimed over a longer period, in addition
to being ineligible to claim bonus depreciation with respect to QIP. In general,
real estate businesses with more debt are likely to benefit from making the
election. Conversely, real estate businesses with relatively low debt levels are
likely to find that when evaluating the business-interest-deduction limitation,
the amount of interest deductions so limited may be minimal, which could lead
those businesses to conclude to not exercise the election.
The changes made to depreciable lives will apply to properties placed in

service after Dec. 31, 2017.37 For taxpayers making the election out of the
business interest limitations that own depreciable assets placed in service
on or before Dec. 31, 2017, the details around the application of the ADS
lives is currently unclear. See section III.D.3 of this guide, Business Interest
Limitations, for additional discussion regarding the effect of the election out of
the business interest limitations on depreciable assets placed in service on or
before Dec. 31, 2017.
2. Business Interest Expense Limitation
One of the more revolutionary changes in the new law is the dramatic
expansion of limits to the amount of business interest expense that every
35 IRC Section 168(g)(8), as amended by Section 13204(a)(3)(A) of P.L. 115-97.
36 IRC Section 168(k)(2)(D). Although IRC Section 168(k)(2)(D)(i) does provide an exception to this general
prohibition for taxpayers voluntarily electing to use ADS lives under IRC Section 168(g)(7), the use of ADS
lives under the real property trade or business election falls under IRC Section 168(g)(8). As such, qualified
improvement property depreciated using ADS lives by virtue of making the election under IRC Section 168(g)(8)
is not eligible for bonus depreciation.
37 Section 13204(b)(1) of P.L. 115-97.

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business, regardless of form, can deduct. Before the enactment of P.L. 115-97,
the limitation on interest deductibility was narrowly crafted, applied only to
corporations, and only disallowed interest deductions for corporations with
exceptionally high levels of debt.38
Under P.L. 115-97, a new limitation is applied to every business (subject to

certain exemptions and limitations), including pass-through entities.39 The
limitation is calculated as follows. First, the business is allowed to net any
business interest income against business interest expense to arrive at net
interest expense, and exclude the floor plan financing interest (largely only
applicable to car dealers and similar businesses).40 This net interest expense is
then subject to a limitation equal to 30 percent of adjusted taxable income for
the business.41 Any disallowed business interest expense for any taxable year will
be treated as business interest expense paid or accrued in the following taxable
year,42 effectively allowing taxpayers to indefinitely carry forward interest
expense not deducted, until such time as the taxpayer generates sufficient
income of the character needed to absorb the interest deduction.
Adjusted taxable income is defined as taxable income computed

without regard to:
• Any item of income, gain, deduction, or loss which is not properly allocable
to a trade or business;
• Any business interest expense or business interest income;
• The amount of any net operating loss (NOL) deduction;
• Any deduction allowable under Section 199 (relating to domestic production
activities) or 199A (relating to deductions for pass-through income);
• Any deduction for depreciation, amortization, or depletion (for tax years
beginning before Jan. 1, 2022) and
• Computed with other such adjustments as determined by the Secretary of
Treasury.43
38 IRC Section 163(j), prior to the enactment of P.L. 115-97.

39 IRC Section 163(j)(4), as amended by Section 13301(a) of P.L. 115-97.
40 IRC Section 163(j)(1)(A) and (C), as amended by Section 13301(a) of P.L. 115-97.
41 IRC Section 163(j)(1)(B), as amended by Section 13301(a) of P.L. 115-97.

Of particular interest is that the calculation of adjusted taxable income changes

over time. For tax years before 2022, the calculation allows the taxpayer to
effectively add back depreciation, amortization and depletion. However, after
2022, the calculation no longer permits this adjustment.44 Mathematically
speaking, this change will result in a reduction in the calculation of adjusted
taxable income beginning in 2022 for entities who routinely claim depreciation,
amortization or depletion. As a result, for those entities, the amount of interest
deductible after 2022 will drop, and in some cases precipitously so.
There are a number of exemptions to the business interest expense deduction

limitations. First, certain regulated public utilities or certain electric
cooperatives are exempt by definition.45 Also exempted are businesses with
average annual gross receipts of less than $25 million during the three
preceding years, adjusted for inflation.46 However, this exemption does not
apply to businesses that are defined as tax shelters prohibited from using the
cash method of accounting for federal income tax purposes.47 Of particular
interest to tax credit partnerships, this provision exemption generally excludes
partnerships where a limited partner or non-managing member is allocated
35 percent or more of the taxable losses, which is likely to include many tax
credit partnerships.48 Finally, real property trades or businesses and farming
businesses have the option to make an election out of the interest deductibility
limitations; although once made, the election is irrevocable. 49 The election would
exempt the business from the interest expense deduction limitation, but would
require the use of the ADS to depreciate certain assets50 (see section II.A.1.c.
Real Property Depreciable Life for an additional discussion regarding the use of
ADS lives under this election).
44 IRC Section 163(j)(8)(A)(v), as amended by Section 13301(a) of P.L. 115-97.

45 IRC Section 163(j)(7)(A)(iv), as amended by Section 13301(a) of P.L. 115-97. This provision is written very
broadly, and may be applicable to renewable energy projects, depending on the precise facts and circumstances.
46 IRC Section 163(j)(3), as amended by Section 13301(a) of P.L. 115-97, and in coordination with IRC Section
448(c).
48 IRC Section 163(j)(3), as amended by Section 13301(a) of P.L. 115-97, in coordination with IRC Section 448(a)
(3), 448(d)(3), 461(i)(3)(B), and 1256(e)(3)(B).
50 IRC Section 168(g)(1)(F), as amended by Section 13204(a)(3)(A) of P.L. 115-97.

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Eligibility for the election is limited to real-property trades or businesses that

include development, redevelopment, construction, reconstruction, acquisition,
conversion, rental, operation, management, leasing or brokerage of real estate.51
Although the determination of the amount of the limitation on interest

deductions is required to be calculated at the tax-filer level, special rules
also apply these same limits to partnerships.52 For partnerships, the interest
deduction limitations are first applied at the partnership level. However, rather
than accumulate any nondeductible business interest expense at the partnership
level and carry it forward to future years, the nondeductible business interest
expense for each year is allocated by the partnership to the partners in the
same manner as the partnership allocated the nonseparately stated items of
taxable income or loss.53 This nondeductible business interest allocated by the
partnership to the partners is referred to as excess business interest.54 Once
the partners are allocated this excess business interest, it must be carried
forward and can only be offset against future excess taxable income generated
specifically by the partnership that originally allocated the nondeductible
interest to the partner.55 Any nondeductible interest accumulated at the partner
level may be carried forward indefinitely,56 with special rules applying at such
time as the partner disposes of its interest in the partnership (discussed further
below). For S-corporations, similar rules are applied.57
Partners who receive an allocation of nondeductible interest from a partnership

must reduce their basis in the partnership (but not below zero) by the amount of
this nondeductible interest.58
Nondeductible interest allocated by a partnership to its partners that is carried

forward to future years is available to be deducted in future years to the extent
51 Real property trades and businesses are defined in IRC Section 469(c)(7)(C) as any real property development,
redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or
brokerage trade or business.
53 IRC Section 163(j)(4)(B)(i), as amended by Section 13301(a) of P.L. 115-97.
54 IRC Section 163(j)(4)(B)(i)(II), as amended by Section 13301(a) of P.L. 115-97.
55 IRC Section 163(j)(4)(B)(ii)(I), as amended by Section 13301(a) of P.L. 115-97.
56 IRC Section 163(j)(4)(B)(ii)(II), as amended by Section 13301(a) of P.L. 115-97.
57 IRC Section 163(j)(4)(D), as amended by Section 13301(a) of P.L. 115-97.
58 IRC Section 163(j)(4)(B)(iii)(I), as amended by Section 13301(a) of P.L. 115-97.

that the partnership allocates excess taxable income.59 Additionally, excess

taxable income allocated by a partnership to a partner is added to the adjusted
taxable income of the partner, which could be used to offset interest deductions
for debt borrowed at the partner level.60 The calculation of excess taxable income
generated by a partnership is calculated on an annual basis. The calculation
is equal to a percentage of the partnership’s adjusted taxable income (defined
above). To calculate excess taxable income, use the following steps:
• Step 1: Start with the partnership’s adjusted taxable income and multiply by
30 percent.
• Step 2: Calculate the partnership’s net business interest (business interest
expense less business interest income).
• Step 3: Subtract step 2 from step 1 (but no less than zero).
• Step 4: Divide the result of Step 3 by the amount calculated in Step 1.
• Step 5: Multiply this fraction by the partnership’s adjusted taxable income to
arrive at the partnership’s excess taxable income. 61
For example, if a partnership has taxable income during the year of $1,000,
which includes zero business interest income and $100 in business interest
expense, then the calculation of excess taxable income would be as follows:
• Step 1: Adjusted taxable income = $1,100 (equal to $1,000 in taxable income

plus $100 in business interest expense), multiplied by 30 percent = $330.
• Step 2: Subtract net business interest of $100, calculated as $100 in business
interest expense less zero business interest income.
• Step 3: Step 1 less step 2 = $330 less $100 = $230.
• Step 4: Step 3 divided by Step 1 = $230 ÷330 = 69.69 percent
• Step 5: Adjusted taxable income of $1,100 x 69.69 percent (the fraction
calculated in Step 4) = excess taxable income of $767.
In the case of a disposition of a partnership interest, the partner calculates

their basis in the partnership immediately before the disposition (including
the cumulative net reductions to their basis from nondeductible interest
59 IRC Section 163(j)(4)(B)(ii)(I), as amended by Section 13301(a) of P.L. 115-97.

60 IRC Section 163(j)(4)(A)(ii)(II), as amended by Section 13301(a) of P.L. 115-97.
61 IRC Section 163(j)(4)(C), as amended by Section 13301(a) P.L. 115-97.

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allocated to them in prior years) and then adds any amount of cumulative excess
business interest to their basis.62 This adjustment applies not just to sales of
partnership interests, but also applies to other transactions, including transfers
of partnership interests by reasons of death, and other transactions where gain
is not recognized, either in whole or in part.63
As it relates to dispositions of partnership interests and the treatment of

cumulative net nondeductible interest, P.L. 115-97 includes a somewhat cryptic
notation regarding dispositions. This notation prohibits a deduction to a
transferor or transferee for any excess business interest resulting in a basis
increase at disposition.64 Many practitioners believe that this notation merely
instructs taxpayers that because they receive the addition to basis upon sale
or disposition of their partnership interest, they should not also deduct the
heretofore-nondeductible excess business interest. However, in the case of a sale,
because the language is written so broadly, it is unclear whether this prohibition
would affect the seller’s calculation of the gain or loss on sale.
The treatment of tiered partnerships, particularly as it relates to nondeductible

interest allocated from a lower tier, is not specifically addressed in the statute
and is therefore somewhat unclear. In general, partnerships that invest in other
partnerships have historically aggregated the pass-through activity from the
underlying partnerships and allocated it in turn to their partners. In this way,
partnership tax attributes are always passed through to the partners, regardless
of how many tiers of partnerships exist in the structure. In this case, several
of the detailed elements underlying the mechanical operation of this provision
seem to imply that nondeductible interest allocated by a lower-tier partnership
should not be further passed up the ownership chain by a partnership that is a
partner in that lower-tier partnership. In particular, the provisions surrounding
the calculation of the release of previously nondeductible interest and the
adjustment to a partner’s basis in the partnership upon disposition of their
partnership interest both would seem to be administratively difficult or even
impossible to properly track through a multi-tiered partnership in conformity
with the provisions in the statute. Absent future guidance to the contrary, the
62 IRC Section 163(j)(4)(B)(iii)(II), as amended by Section 13301(a) P.L. 115-97.

64 See the last sentence of IRC Section 163(j)(4)(B)(iii)(II), as amended by Section 13301(a) of P.L. 115-97.

provisions outlined in the statute seem to imply that the nondeductible interest
allocated by a lower-tier partnership should not be further passed up the
ownership chain by an upper-tier partnership.
For debt borrowed at an upper-tier partnership in a tiered partnership structure

that is used to invest in a lower-tier partnership engaged in a real estate trade
or business, it is unclear how the upper-tier partnership would treat interest
expense. Although additional guidance is needed, some industry practitioners
have theorized that such funds are used in a real property trade or business
at the upper-tier partnership and the upper-tier partnership would be entitled
to elect to be treated as a real property trade or business. It is also unclear as
to whether the upper-tier partnership would be eligible for the election if the
lower-tier partnership does not also make the election. Somewhat conversely,
others believe that interest tracing rules65 should allow upper-tier partnerships
to categorize interest expense incurred at the upper-tier level based on the use of
the upper-debt proceeds. Such that if upper-tier debt proceeds are used to fund
a capital contribution to a partnership electing real property trade or business
status, then the upper-tier interest expense would be treated as from a real
property trade or business.
At present, the time and manner of making the election is unclear. Although
the election is intended to be irrevocable,66 it is unclear whether the taxpayer
must make the election in the first year that it is eligible to make the election,
or whether it is possible to defer the election to later years. Additionally, it
is unclear whether the election is a one-time election, an annual election,
or a one-time election that lasts for the duration of the entity. See section
III.D.3 Business Interest Limitations for additional discussion regarding the
potential factors affecting the decision for when to make the election out of the
business interest limitations.
65 See, for example, IRS Notice 88-99, 88-20, 89-35, and 88-37, as well as Treasury Regulation Section 1.163-8T.
66 IRC Section 163(j)(7)(B), as amended by Section 13301(a) of P.L. 115-97. Although this clause provides that the
election, once made, shall be irrevocable, in informal comments made since the passage of P.L. 115-97, the IRS
has suggested that it has not yet concluded whether the election is a one-time irrevocable election that lasts for
the life of the entity, or whether the election is perhaps an annual election that cannot be revoked for that year.

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The provisions related to the business interest expense limitation apply to

taxable years beginning after Dec. 31, 2017.67 Of particular importance, the
amendments related to electing real property trades or businesses are also
effective for taxable years beginning after Dec. 31, 2017.
3. Certain Special Rules for Taxable Year of Inclusion
Income is generally included in taxable income no later than the date of receipt
(or constructive receipt) unless the item is accounted for in a different period
under the taxpayer’s method of accounting.68
However, under P.L. 115-97, new rules related to the timing of the recognition
of gross income now apply to taxpayers whose income is computed under an
accrual method of accounting.69 Under these new rules, for taxpayers who meet
certain requirements, gross income is recognized not later than for financial
accounting purposes.70
Not all taxpayers are subject to these new rules. Only taxpayers whose taxable
income is computed under an accrual method of accounting are required to
recognize gross income based on this timeline.71 Additionally, only taxpayers
who issue certain financial statements are subject to this requirement.72 Finally,
the statute specifically excludes items of gross income recognized in connection
with a mortgage servicing contract.73
The following financial statements certified as being prepared in accordance

with generally accepted accounting principles (GAAP) trigger this requirement:74
67 Section 13301(c) of P.L. 115-97.

68 IRC §451(a).
69 IRC Section 451(b)(1)(A), as amended by Section 13221(a) of P.L. 115-97.
72 IRC Section 451(b)(1)(B)(i), as amended by Section 13221(a) of P.L. 115-97.
73 IRC Section 451(b)(1)(B)(ii), as amended Section 13221(a) of P.L. 115-97.

1. A 10–K (or successor form), or annual statement to shareholders, required

to be filed by the taxpayer with the United States Securities and Exchange
Commission (SEC),
2. an audited financial statement used for credit purposes, reporting to

shareholders, partners, or other proprietors, or to beneficiaries, or
3. any other substantial nontax purpose.
The Treasury Secretary also has the authority to expand the types of financial
statements that trigger this requirement.75
For taxpayers with multiple financial statements, the ordering rules start with
filings with the SEC, then move to audited financial statements used for credit
purposes, reporting to owners, and stakeholders, or any other substantial
nontax purpose.76 Finally, if none of the above financial statements applies, then
the taxpayer would use financial statements that are filed with any other federal
agency for purposes other than federal tax purposes.77
For taxpayers who do not issue GAAP financial statements, additional rules
apply that capture financial statements issued on the basis of international
financial reporting standards and filed with a foreign agency that is equivalent
to the SEC.78 Interestingly, to qualify under this approach, the reporting
standards for the foreign agency must be no less stringent than those required
by the SEC. Precisely how taxpayers will assess the relative stringency of
reporting guidelines for any of the various items of revenue recorded for foreign
reporting vis-à-vis SEC standards was not outlined in the statute.
The rules include a few additional provisions of interest. First, for contracts that
include multiple elements, the allocation of the price to each of the various elements
is a critical aspect of the timing and amounts recognized as income. However,
taxpayers are now required to use the same method for tax purposes to allocate
75 IRC Section 451(b)(3)(C), as amended by Section 13221(a) of P.L. 115-97.

76 IRC Section 451(b)(3)(A)(ii), as amended by Section 13221(a) of P.L. 115-97.
77 IRC Section 451(b)(3)(A)(iii), as amended by Section 13221(a) of P.L. 115-97.
78 IRC Section 451(b)(3)(B), as amended by Section 13221(a) of P.L. 115-97.

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the price across multiple items as they use for financial statement purposes.79
Second, for entities that report on a combined or consolidated basis for financial
statement purposes, the combined or consolidated financial statements will be
treated as the applicable financial statement.80
The amendment to the year of inclusion of income applies to taxable years

beginning after Dec. 31, 2017.81
New rules for advance payments received
A cash-basis taxpayer generally must include an amount in taxable income when

the amount is received (actually or constructively). An accrual-basis taxpayer
generally must include an amount in taxable income as soon as the amount is
earned by or received by the taxpayer. However, under P.L. 115-97, the general
rule has changed for accrual method taxpayers and now requires that advance
payments must be included in the taxable year they are received.82
There is an exception to this general rule, although it is only available if the

taxpayer makes an election.83 If the election is made, advance payments
are included in taxable income in the year the payments are received to the
extent the payments are recorded as income on the financial statements. Any
remaining portion of advance payments is recognized as taxable income in the
year following receipt. This election is effective for the taxable year in which the
election is made as well as all subsequent years and can only be revoked with the
consent of the Treasury Secretary.84
The new rule does not apply to all advanced payments received. While the rule
specifically applies to revenue associated with goods, services, and other items,85
several items are specifically excluded, including rent, insurance premiums,
payments with respect to financial instruments and other items.86
79 IRC Section 451(b)(4), as amended by Section 13221(a) of P.L. 115-97.

81 Section 13221(c) of P.L. 115-97.
82 IRC Section 451(c)(1)(A), as amended by Section 13221(b) of P.L. 115-97.
83 IRC Section 451(c)(1)(B), as amended by Section 13221(b) of P.L. 115-97.
85 IRC Section 451(c)(4)(A)(iii), as amended by Section 13221(b) of P.L. 115-97.

Advance payments include more than payments actually received by the taxpayer.
It also includes payments that are constructively received. Additionally, advance
payments include items that are due and payable to the taxpayer.87
Should an entity be required to change its method of accounting for the first
taxable year beginning after Dec. 31, 2017, to address these provisions, such
change shall be treated as initiated by the taxpayer and shall be treated as made
with the consent of the Treasury Secretary.88
The amendment to the rules for advance payments received applies to taxable
years beginning after Dec. 31, 2017.89
4. Modifications of Gross Receipts Test for Use of Cash

Method of Accounting by Corporations and Partnerships
Because of the favorable treatment afforded to cash-basis taxpayers regarding

the timing of recognition of income and deductions, tax law deliberately limits
the taxpayers who are eligible to use the cash method. Before the enactment of
P.L. 115-97, C corporations and partnerships with a C corporation partner may
only use the cash method of accounting if they have average gross receipts of
$5 million or less (the applicable dollar limit) during the previous three years
(the gross receipts test). All other business structures (with the exception of
farm corporations and farm partnerships) generally may use the cash method
whether or not they meet the gross receipts test.90
Under P.L. 115-97, the applicable dollar limit of $5 million was increased to
$25 million.91 Additionally, the applicable dollar limit is indexed for inflation
for tax years beginning after Dec. 31, 2018.92 Therefore, under P.L. 115-97, C
corporations and partnerships with a C corporation partner may use the cash
method if they have average gross receipts of $25 million or less during the
87 IRC Section 451(c)(4)(C), as amended by Section 13221(b) of P.L. 115-97.

88 Section 13221(d) of P.L. 115-97.
89 Section 13221(c) of P.L. 115-97.
90 IRC Section 448(c), as existed prior to the enactment of P.L. 115-97.
91 IRC Section 448(c)(1), as amended by Section 13102(a) of P.L. 115-97.
92 IRC Section 448(c)(4), as amended by Section 13102(a) of P.L. 115-97.

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previous three years (the gross receipts test), thereby creating a more inclusive
limit. All other business structures (with the exception of farm corporations and
farm partnerships) generally may continue to use the cash method whether or
not they meet the gross receipts test.
The use of the cash method of accounting has historically been virtually
nonexistent with respect to partnerships engaged in tax credit transactions,
both because it is often undesirable, as well as being prohibited based on the
partners and their taxable income and loss allocation percentages. Many tax
credit partnerships are owned in part by limited partners or limited liability
company members that are allocated more than 35 percent of the losses
generated by the partnership. Generally speaking, in situations where limited
partners or non-manager limited liability company members are allocated more
than 35 percent of the losses, the cash method of accounting is prohibited.93
This limitation was not changed by P.L. 115-97.
Should an entity be required to change its method of accounting to address these

provisions, such change shall be treated as initiated by the taxpayer and treated
as made with the consent of the Treasury Secretary.94
The amendment to the gross receipts test applies to taxable years beginning after
Dec. 31, 2017.95
5. Partnership Interest for Services
Federal tax law has long provided for favorable tax rates and other benefits for
long-term ownership of investments. However, over the years, concerns have
arisen about the potential for individuals in certain industries to qualify for
these tax benefits for what many critics feel is little more than wage income.
In an attempt to address those concerns, to qualify for the preferential tax
rates associated with long-term capital gains treatment, P.L. 115-97 places new
93 See IRC Section 448(a)(3), which in turn refers to IRC Section 448(d)(3), 461(i)(3)(B), 1256(e)(3)(B) and former
Section 464(e)(2).
94 IRC Section 448(d)(7), as amended by Section 13102 of P.L. 115-97.
95 Section 13102(e) of P.L. 115-97.

requirements on certain partnership interests related to services performed in

specific industries.96
More specifically, gains with respect to “applicable partnership interests” are

treated as short-term capital gains unless, in the case of a sale of the partnership
interest, the partnership interest has been held for more than three years;
alternatively, in the case of assets held and sold by the partnership, the assets
themselves have been held for more than three years.97 Applicable partnership
interests include interests transferred to or held by a taxpayer in connection
with the performance of substantial services by the taxpayer, or any other
related person, in any “applicable trade or business.”98 Several exceptions
apply including: (1) partnership interests held by corporations; (2) capital
interests received commensurate with the amount of capital contributed to
the partnership by the partner; (3) capital interests to the extent of the value
included in taxable income of the recipient partner upon the receipt or vesting of
such partnership interest.99 The provision is not intended to apply to income or
gain from any asset not held for portfolio investment for third party investors.100
In turn, this new rule only applies to certain businesses defined as an applicable
trade or business. An applicable trade or business means any activity conducted
on a regular, continuous and substantial basis that consists, in whole or in
part, of (1) raising or returning capital and (2) either investing in or developing
“specified assets.”101 Specified assets includes securities, commodities, real estate
held for rental or investment, cash or cash equivalents, options or derivative
contracts with respect to the foregoing and partnership interests invested in any
of the foregoing.102
The provision appears to capture gains flowing to the taxpayer from applicable
partnerships investments even if the taxpayer does not dispose of such interests
during the taxable year.
96 Section 13309 of P.L. 115-97.

97 IRC Section 1061(a), as instituted by Section 13309(a) of P.L. 115-97.
98 IRC Section 1061(c), as instituted by Section 13309(a) of P.L. 115-97.
99 IRC Section 1061(c)(4), as instituted by Section 13309(a) of P.L. 115-97.
100 IRC Section 1061(b), as instituted by Section 13309(a) of P.L. 115-97.

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This requirement is likely to apply to for-profit developers of affordable

housing, historic rehabilitation and renewable energy projects, although its
effect will likely be limited. It is common for these developers to receive a
partnership interest in exchange for services rendered to a partnership that
plans to develop the project. Often the developer receives a general partner
(or managing member) ownership interest in a limited partnership (or limited
liability company) in exchange for locating and acquiring the land on behalf of
the limited partnership. Although the new three-year holding requirement is
likely to apply to this situation, because most developers hold their partnership
interests for much longer than three years, the effect of this provision will likely
be limited to rare situations in which the developer sells or exits very early in the
development life cycle.
This change is effective for tax years beginning after Dec. 31, 2017.103
6. Change to Chained CPI
Tax law has long included adjustments to various provisions to account for
inflation. The annual adjustments for inflation are intended to avoid the need
for legislative action every year simply because a dollar today is worth less than
a dollar from a year ago or from 10 years ago. Many provisions and calculations
within tax law automatically factor these annual inflation adjustments, including
everything from tax brackets, standard deduction amounts and the amount of
LIHTCs available each year. Economists have long debated the most appropriate
calculation methodology for calculating inflation and tax policymakers for many
years have hotly debated this same issue. Before the enactment of P.L. 115-97,
annual inflation adjustments were calculated based on the Consumer Price
Index for all Urban Consumers (CPI). As a means of reducing the rate of annual
increases, under P.L. 115-97, the annual inflation adjustment factor beginning
in 2018 will be the Chained Consumer Price Index for all Urban Consumers
(chained CPI ) as published by the Department of Labor’s Bureau of Labor
Statistics (BLS).104 Both indexes measure the average monthly price changes paid
by urban consumers for a basket of goods and services.
103 Section 13309(c) of P.L. 115-97.

104 IRC Section 1(f)(3), as amended by Section 11002(a) of P.L. 115-97.

There are several characteristics of chained CPI that sets it apart from CPI. 105
The main difference between chained CPI and CPI is that CPI does not take
into account the likelihood that consumers will substitute one good for another
in the face of rising prices, something known as substitution bias. Conversely,
chained CPI measures changes in a basket of goods and services at two points
in time–the period before and the period after a change in price. The prices of
these baskets are then averaged each month, which creates a “chained” price
index from month to month, from which the chained CPI index derives its name.
It is the month-to-month changes that capture any substitutions consumers may
make when the price of one good increases or another decreases. Another type
of bias inherent in the CPI calculation that chained CPI attempts to address is
“small-sample bias.” Both CPI and chained CPI use the same item-area indices
to measure the costs of goods, but CPI uses an arithmetic averaging formula
to aggregate those indices into an overall calculation of price growth for the
country. Chained CPI, on the other hand, uses a geometric averaging formula
(where the increases are multiplied together and the nth root is taken, where n
is the number of increases), which has the mathematical effect of reducing the
effect of temporary spikes in prices. A third difference between the two indexes
is that chained CPI is revised over time, with initial, interim and final values
released over a period of 10 to 16 months as more refined historical information
is available, whereas CPI is released once and never revisited.106
Many economists claim the chained CPI is a better measure of inflation since
it captures substitutions and accounts for biases that are ignored by CPI.
Historically speaking, and based on the general principles used to calculate each
of the indices, the inflation adjustment calculated each year using chained CPI
has generally been lower than the inflation adjustment calculated using CPI.
Although the differences in any given year have traditionally been minor, over
long periods of time, and factoring in the effects of compounding, the differences
between using CPI and chained CPI can mathematically grow to a tremendous
chasm.
105 Testimony presented by the Congressional Budget Office before the Subcommittee on Social Security, Committee
on Ways and Means, U.S. House of Representatives, April 18, 2013–Using Chained CPI to Index Social
Security, Other Federal Programs, and the Tax Code for Inflation–informed this discussion about the bias and
calculation differences between CPI and Chained-CPI as measures of cost of living adjustments.
106 The Hutchins Center Explains: The Chained CPI, Michael Ng and David Wessel, The Brookings Institution, Dec.
7, 2017.

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This can have major repercussions as the cost-of-living adjustment affects

a broad set of tax parameters. Income tax brackets are adjusted annually to
provide for mandatory cost-of-living adjustments.107 Smaller cost-of-living
increases could in turn result in smaller tax bracket thresholds increases,
which may push households into higher tax brackets. Private activity bond
(PAB) allocations are also subject to cost-of-living adjustments.108 In the case of
9 percent LIHTCs, the cost-of-living adjustment is used to adjust the housing
credit dollar amount allocated to state housing credit agencies.109 Over time, all
other things being equal, the use of chained CPI in lieu of CPI would notably
reduce the number of tax credits available to produce affordable housing, simply
due to the reduced annual inflation factor. That would result in comparatively
smaller amounts of 9 percent annual allocations available, as well as lower
PAB volume cap available to finance affordable housing (see section III.B
Private Activity Bonds of this guide for more information on PAB volume
cap calculations). Novogradac’s analysis of the effect a switch to the chained
CPI on affordable housing production finds that the resultant lower inflation
adjustments would lead to between 18,700 and 19,900 fewer affordable rental
homes produced, with both 4 percent and 9 percent credits, over the next 10
years.110 Over the years following the next decade, the dramatic gap in affordable
housing production would continue to mathematically grow to ever-larger levels.
The LIHTC and PABs are discussed in more detail in section III of this guide.
The effective date of the change to using chained CPI to calculate inflation
adjustments applies to tax years beginning after Dec. 31, 2017.111
107 IRC Section 1(f)(3).

108 IRC Section 146(d)(2)(B).
109 IRC Section 42(h)(3)(H)(i)(II).
110 Final Tax Reform Bill Would Reduce Affordable Rental Housing Production by Nearly 235,000 Homes, Michael
Novogradac, Dec. 19, 2017. Novogradac & Company LLP blog post: https://www.novoco.com/notes-from-
novogradac/final-tax-reform-bill-would-reduce-affordable-rental-housing-production-nearly-235000-homes.
111 Section 11002(e) of P.L. 115-97.

B. Corporate Tax Changes

The provisions of P.L. 115-97 detailed here specifically apply to corporations
and aim to make the U.S. more competitive by simplifying and reducing the
corporate tax rate while at the same time ensuring that corporate taxpayers
doing business in the U.S. pay their appropriate tax liability. The changes
detailed below will have far-reaching implications for tax credits, which will be
expanded upon in subsequent sections of this guide.
1. Corporate Tax Rate
P.L. 115-97 replaces the graduated corporate tax rate structure with a single
corporate tax rate of 21 percent of taxable income.112 This change will apply to all
conforming amendments listed in the law.113 The table below details the current
and revised corporate tax rate.
REVISED CORPORATE
PREVIOUS CORPORATE TAX RATE
TAX RATE
Taxable income: Tax owed:

$0 - $50,000 15 percent
$50,001 - $75,000 $7,500, plus 25 percent of the amount over $50,000
$75,001 - $100,000 $13,750, plus 34 percent of the amount over $75,000
$100,001 - $335,000 $22,250, plus 39 percent of the amount over $100,000 21 percent
$335,001 - $10,000,000 $113,900, plus 34 percent of the amount over $335,000
$10,000,001 - $15,000,000 $3,400,000, plus 35 percent of the amount over $10,000,000
$15,000,001 - 18,333,333 $5,150,000, plus 38 percent of the amount over $15,000,000
Over $18,333,333 35 percent
The change to the corporate tax rate applies to tax years beginning after Dec. 31,
2017.114
112 IRC Section 11(b), as amended by Section 13001(a) of P.L. 115-97.

113 Section 13001(b) of P.L. 115-97.
114 Section 13001(c) of P.L. 115-97.

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2. Repeal of Corporate Alternative Minimum Tax
P.L. 115-97 repeals the corporate alternative minimum tax (AMT) rate.115
Previously, the corporate AMT was 20 percent of a corporation’s alternative
minimum taxable income (AMTI) that exceeded the $40,000 exemption
amount, minus the alternative minimum tax foreign credit for the taxable
year.116 For any AMT credits carried forward from prior years, the taxpayer will
be able to claim a refund of 50 percent of the credits that remain in taxable
years beginning in 2018, 2019, and 2020, and 100 percent for taxable years
beginning in 2021.117
In general, the effective date of the repeal to corporate AMT is any taxable
year beginning after Dec. 31, 2017.118 Amendments to eliminate the AMT credit
carryforward will apply to taxable years beginning after Dec. 31, 2021.119
3. Base Erosion and Anti-Abuse Tax (BEAT)
Although the corporate AMT was repealed by P.L. 115-97, a new parallel taxation
system was introduced for corporations, known as the Base Erosion and Anti-
Abuse Tax (BEAT).120 Similar to the AMT, the BEAT essentially requires that
corporate taxpayers calculate their tax liability two ways: first, under the regular
tax system, and then second, using the BEAT system. Corporate taxpayers must
then pay the higher of the two calculations.121
At its heart, the BEAT is intended to impose a minimum tax on corporations

doing business in the United States that make payments to foreign based
subsidiaries and foreign-based related parties. From a public policy perspective,
the BEAT is intended to prevent corporations doing business in the United States
from minimizing their U.S. tax liability through mechanisms that shift income
to foreign jurisdictions.
115 Section 12001(a) of P.L. 115-97.
116 IRC Section 55(b).
117 Section 12002(a) of P.L. 115-97.
118 Section 12001(c) of P.L. 115-97.
119 Section 12002(d) of P.L. 115-97.
120 Section 14401 of P.L. 115-97.
121 IRC Section 59A(b), as instituted by Section 14401(a) of P.L. 115-97.

Not all corporations are subject to the BEAT. Regulated investment companies,
real estate investment trusts and S corporations are specifically exempted
from the BEAT.122 In addition to these specific exceptions, only the largest
corporations that meet a certain threshold of BEAT deductions are subject to the
BEAT. To be subject to the BEAT, a corporation must have at least $500 million
in average annual gross receipts for the past three years. Additionally, to be
subject to the BEAT, a corporation must also have a base erosion percentage of
at least 3 percent, with 2 percent being used in the case of banks and registered
securities dealers.123 The base erosion percentage is just one of several newly
defined terms that are critical to assessing the applicability and calculation of
the BEAT for any given corporate taxpayer.
The base erosion percentage is determined by dividing the aggregate amount of

base erosion tax benefits for the corporation for the taxable year by aggregate
amount of deductions for the corporation for the taxable year.124 In turn, the
base erosion tax benefits for the corporation are equal to deductions associated
with base erosion payments, deductions for depreciation for property acquired
with respect to a base erosion payment and reductions in gross income
associated with base erosion payments.125 Finally, a base erosion payment is any
amount paid or accrued by the corporation to a foreign-related party,126 although
derivative payments by definition are excluded from base erosion payments.127
The BEAT is calculated by first calculating modified taxable income. Modified

taxable income is little more than taxable income calculated under the regular
tax regime, with adjustments to add back base erosion tax benefits and the
effect of NOL carryforwards and carrybacks.128 This modified taxable income is
then multiplied by the BEAT rate to calculate the BEAT.129 The following table
122 IRC Section 59A(e)(1)(A), as instituted by Section 14401(a) of P.L. 115-97.

123 IRC Section 59A(e)(1)(C), as instituted by Section 14401 of(a) P.L. 115-97.
124 IRC Section 59A(c)(4)(A), as instituted by Section 14401(a) of P.L. 115-97.
125 IRC Section 59A(c)(2)(A), as instituted by Section 14401(a) of P.L. 115-97.
126 IRC Section 59A(d)(1), as instituted by Section 14401(a) of P.L. 115-97.
127 IRC Section 59A(h), as instituted by Section 14401(a) of P.L. 115-97.
128 IRC Section 59A(c)(1), as instituted by Section 14401(a) of P.L. 115-97.
129 IRC Section 59A(b)(1)(A), as instituted by Section 14401(a) of P.L. 115-97.

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outlines the BEAT rate for 2018, 2019 to 2025 and thereafter, for two categories
of corporations.
NON-BANK/SECURITIES
TAXABLE YEAR BANK AND SECURITIES DEALERS
CORPORATIONS
2018 5 percent 130 6 percent 131

2019-2025 10 percent 132 11 percent 133
2026 and thereafter 12.5 percent 134 13.5 percent 135
Of particular interest to the tax credit community, only certain tax credits are
available to offset the BEAT, their efficacy is sometimes limited, and even then
they can only be applied against the BEAT for certain tax years. The following
table summarizes the ability of tax credits to offset the BEAT:
RESEARCH AND NMTCs, HTCs, AND ALL

TAXABLE YEAR LIHTCs, ITCs AND PTCs
DEVELOPMENT CREDITS OTHER CREDITS 136
2018-2025 100 percent available to 80 percent available to reduce Do not reduce the BEAT
reduce the BEAT137 the BEAT138
2026 and thereafter Do not reduce the BEAT139 Do not reduce the BEAT Do not reduce the BEAT
As a practical matter, this means that for 2018-2025, corporations can use 80
percent of their LIHTCs, ITCs and PTCs in determining their BEAT liability,
which means such corporations will receive between 80 percent and 100 percent
of the benefit of such credits. Viewed in the alternative, they run the risk of
losing the benefit of up to 20 percent of such credits. After 2025, under current
law, LIHTCs, ITCs and PTCs do not offset BEAT liability, such that they risk
losing up to 100 percent of the benefit of such credits. Further, NMTCs, HTCs
and other tax credits never offset BEAT liability. Because P.L. 115-97 does not

131 IRC Section 59A(b)(1)(A) and (b)(3), as instituted by Section 14401(a) of P.L. 115-97.
136 These credits are not included in the definition of “applicable section 38 credits” as outlined in IRC Section
59A(b)(1)(B)(ii)(II) and (b)(4), as instituted by Section 14401(a) of P.L. 115-97.
137 IRC Section 59A(b)(1)(B)(ii)(I), as instituted by Section 14401(a) of P.L. 115-97.
138 IRC Section 59A(b)(1)(B)(ii)(II) and (b)(4), as instituted by Section 14401(a) of P.L. 115-97.
139 No tax credits are included in the calculation of the BEAT applicable to tax years after 2025, as outlined in IRC
Section 59A(b)(2), as instituted by Section 14401(a) of P.L. 115-97.

include any provision for carrying forward any tax credits that do not offset the
BEAT, these unused credits are not carried forward, but are instead merely lost.
The implications of this potential loss of credits due to the operation of the
BEAT will force corporate taxpayers to carefully evaluate and manage their
exposure to the BEAT, to minimize the potential that credits may be lost. In
situations where tax credit investors find that their BEAT liability is projected
to exceed their regular tax liability, those investors may choose to adjust their
plans for future tax credit investments and may also elect to adjust their existing
investments by selling some portion of their existing portfolios.
The BEAT provisions of P.L. 115-97 are effective for tax years beginning
after Dec. 31, 2017.140
C. Noncorporate Tax Changes

This section details P.L. 115-97 provisions that affect individual taxpayers and
non-corporate entities, which can include sole proprietorships, S corporations,
partnerships, and trusts and estates.
1. Provisions Affecting Partners and Partnerships
P.L. 115-97 makes several changes that affect pass-through entities, including
reduction in tax rates applicable to qualified business income, enacting new
limits on deducting business losses, modifying the rule that triggers mandatory
basis reductions on the transfer of a partnership interest, eliminating technical
terminations and changing the tax rates applicable to carried interests, which
was discussed earlier in this guide.
140 Section 14401(e) of P.L. 115-97.

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a) Special Deduction for Qualified Business Income
P.L. 115-97 adds a new provision to allow noncorporate taxpayers to claim a

deduction that effectively reduces the tax rate that applies to certain types of
“qualified business income” by up to 20 percent. The deduction applies only to
qualified business income generated by sole proprietorships, S corporations,
partnerships (including limited liability companies treated as partnerships),
trusts and estates, dividends from investments in real estate investment trusts,
qualified cooperatives and income from publicly traded partnerships. The
deduction does not apply to income of C corporations.141 The deduction is only
available for qualified trades or businesses, which excludes certain service trades
or businesses (discussed further below), and excludes the trade or business of
performing services as an employee.142
The calculation of the deduction begins with qualified business income.143

Subject to certain limitations, qualified business income equals the sum of
20 percent of the qualified trade or business taxable income carried on by the
taxpayer plus 20 percent of real estate investment trust (REIT) dividends and
income from publicly traded partnerships.144 Qualified business income does not
include net capital gains, nor does it include the aggregate amount of qualified
cooperative dividends.145 Partners and S corporation shareholders similarly
include their share of qualified trade or business income from their partnership
or S corporation.146 However, qualified trade or business income is subject
to certain limits based on a percentage of wages paid and/or a percentage of
depreciable business assets held. Namely, qualified trade or business income is
limited to the lesser of 20 percent of qualified business income or the larger of
(a) 50 percent of the wages paid by the taxpayer in connection with qualified
trades or businesses for the year or (b) the sum of 25 percent of wages plus 2.5
percent of the unadjusted tax basis of depreciable business assets determined
immediately after acquisition.147
141 IRC Section 199A(a), as instituted by Section 11011(a) of P.L. 115-97.

143 IRC Section 199A(a)(1)(A), as instituted by Section 11011(a) of P.L. 115-97.
144 IRC Section 199A(b)(1), as instituted by Section 11011(a) of P.L. 115-97.
145 IRC Section 199A(a)(1)(B)(ii), as instituted by Section 11011(a) of P.L. 115-97.
146 IRC Section 199(f)(1), as instituted by Section 11011(a) of P.L. 115-97.

Several details serve to refine the limitations outlined above. With respect to the
wages includable in the calculation of the limitation, wages only include wages
paid to employees that are attributable to the generation of qualified business
income. Additionally, the wages must be properly included on the return
filed by the business with the Social Security Administration within 60 days
of the due date.148
Further, with respect to the calculation of depreciable assets, a number of

criteria must be met. The assets must be tangible property that is depreciable,
so intangible property, land, and other similarly non-depreciable assets
are therefore not included.149 Only assets held at year-end are included.150
Accordingly, assets sold during the year are not included in the computation.
Additionally, the assets must be used at any point during the taxable year in the
production of qualified business income.151 To qualify, the depreciable period for
the assets must not have ended before the close of the taxable year.
Determining the depreciable period for the assets is more complicated than
merely evaluating the depreciable life of the asset. The depreciable period
begins on the date that the property is first placed in service. Conversely, the
depreciable period ends on the later of: 10 years from the date the property
is first placed in service or the last day of the last full year of the applicable
depreciable recovery period that would apply, but ignoring the ADS.152
In cases of short taxable years and where a major portion of a trade or

business is disposed of during the tax year, the Secretary of Treasury will
need to provide guidance.153
Several other limitations and provisos apply to specific situations. For taxpayers
that experience a combined net loss from qualified trades or businesses, that
net loss must be carried forward to the succeeding year to determine qualified
business income for that year.154 Qualified business income must be connected
150 IRC Section 199A(b)(6)(A)(i), as instituted by Section 11011(a) of P.L. 115-97.
151 IRC Section 199A(b)(6)(A)(ii), as instituted by Section 11011(a) of P.L. 115-97.
152 IRC Section 199A(b)(6)(B), as instituted by Section 11011(a) of P.L. 115-97.

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with the conduct of a trade or business within the United States.155 Qualified
items of income, gain, deduction and loss do not include long-term capital gain
or loss, dividend income, interest income that is not properly allocable to a trade
or business activity and income or loss related to commodities, foreign currency
transactions, notional principal contracts and annuities.156 Wages, guaranteed
payments and payments to a partner for services that are paid to the taxpayer
are generally not included in qualified business income.157
Special rules also apply to businesses that are determined to be “specified

service businesses.” Such businesses only qualify for the deduction if the taxable
income of the taxpayer is less than $157,500 (double that for taxpayers filing a
joint return), with the deduction phased out completely as income increases by
$50,000 ($100,000 for joint returns) over the threshold amount.158 Specified
service businesses are businesses in the fields of health, law, accounting,
actuarial science, performing arts, consulting, athletics, financial services,
brokerage services including investment and investment management, trading
or dealing in securities, and any business where the principal asset of such trade
or business is the reputation or skill of one or more employees.159
Special rules apply to REIT dividends, cooperative dividends and publicly

traded partnership income.160 Special rules also apply to trades or businesses
located in Puerto Rico.161
The conference agreement clarifies that the deduction is taken to reduce taxable
income and is not a reduction to determine adjusted gross income.162 This detail
has important implications for any computation under federal tax law that is
based on the taxpayer’s adjusted gross income or taxable income.
The deduction applies to taxable years beginning after Dec. 31, 2017, and
before Jan. 1, 2026.163
155 IRC Section 199A(c)(3)(A)(i), as instituted by Section 11011(a) of P.L. 115-97.

156 IRC Section 199A(c)(3)(B), as instituted by Section 11011(a) of P.L. 115-97.
160 IRC Section 199A(c)(1), (e)(3), (e)(4) and (e)(5), all of which were instituted by Section 11011(a) of P.L. 115-97.
161 IRC Section 199A(f)(1)(C), as instituted by Section 11011(a) of P.L. 115-97.
162 The Joint Explanatory Statement of the Committee on Conference to P.L. 115-97, page 39.
163 IRC Section 199A(i), as instituted by Section 11011(a) of P.L. 115-97 and Section 11011(e) of P.L. 115-97.

b) Changes to Substantial Built-In Loss Basis Adjustments
The purchaser (or beneficiary of a decedent) of a partnership interest may adjust

the basis of the purchaser’s share of the partnership assets as if the purchaser
had purchased the assets directly rather than purchasing a partnership
interest.164 If the basis as adjusted is assigned to depreciable assets, then the
depreciation attributable to the purchased interest is adjusted accordingly.165
This result generally is achieved only if the partnership makes an election.166
However, if the partnership’s assets have a “substantial built-in loss” at the
time a purchaser acquires a partnership interest, a mandatory stepdown may
be required despite the fact that the partnership has never made an election to
adjust the basis of its assets under such circumstances.167
Before P.L. 115-97, a partnership was required to reduce a purchasing partner’s

(or the successor to a decedent’s interest) share of the tax basis of partnership
assets if the fair market value of the partnership assets was less than their
tax bases by more than $250,000.168 Under P.L. 115-97, this requirement was
expanded to include situations where the partnership would allocate a loss of
more than $250,000 if it sold its assets immediately after the date the transferee
acquired its interest.169
The committee report presents an example where a partnership has an

overall built-in gain on its assets, but certain assets have a built-in loss, which
is specifically allocated to only one or more partners under the applicable
partnership agreement.170 In such a situation, the former rules for a mandatory
stepdown would not apply since the partnership had an overall built-in gain in
its assets. Under the revised statute, a loss that would be specifically allocated
to one or more partners would trigger a mandatory step-down if such loss
exceeds $250,000 regardless of the amount of gain or loss in the partnership
assets taken as a whole.
164 IRC Section 754.

165 That is, if the basis adjustment is positive, the purchaser has more depreciation while if the adjustment is
negative, the purchaser has less depreciation.
166 IRC Section 754.
167 IRC Section 743(d).
168 IRC Section 743(d)(1)(A).
169 IRC Section 743(d)(1)(B), as amended by Section 13502(a) of P.L. 115-97.
170 The Joint Explanatory Statement of the Committee on Conference to P.L. 115-97, page 370.

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This change is effective for transfers of partnership interests

after Dec. 31, 2017.171
c) Basis Adjustments for Partnership Charitable Contributions and Foreign Taxes
Partners are limited in deducting their share of partnership losses and expenses
to the extent of the tax basis of their partnership interest.172 In computing
this limit, before P.L. 115-97, partners ignored their share of both charitable
contributions and foreign taxes paid by the partnership.173 Under the provisions
of P.L. 115-97, partners are required to include these items in determining their
overall limit for deducting their share of partnership loss and expenses.174 There
is one exception to this general rule–the excess of the fair market value over the
partnership’s tax basis of donated property is not a basis reduction under this
new provision.175
The change is effective for tax years beginning after Dec. 31, 2017.176
d) Changes to Technical Terminations of Partnerships
P.L. 115-97 eliminated the deemed termination of a partnership in certain

situations, previously known as a technical termination.177 Before P.L. 115-97,
a partnership was deemed to terminate whenever 50 percent or more percent
of partnership capital and profits are transferred by sale or exchange within a
12-month period.178 Revoking the technical termination rules results in several
beneficial outcomes for taxpayers. First, a termination caused the partnership
to file two short-period returns if the triggering event occurred other than on
the first or last day of its tax year and penalties could apply for late filing of
the returns if they were not filed on time. Under the new law, even in the event
171 Section 13502(b) of P.L. 115-97.

172 IRC Section 704(d).
173 Private Letter Ruling 8405084.
174 IRC Section 704(d)(3)(A), as amended by Section 13503(a)(3) of P.L. 115-97.
175 IRC Section 704(d)(3)(B), as amended by Section 13503(a)(3) of P.L. 115-97.
176 Section 13503(b) of P.L. 115-97.
177 Section 708(b)(1)(B), as existed prior to the revisions made by Section 13504 of P.L. 115-97.
178 Id.

of partnership interest transfers, the partnership will only file a single return
for the tax year. Second, partnership depreciable assets were required to be
re-placed in service as if the partnership property was newly acquired, which
resulted in lower depreciation deductions for tax years following the year in
which the technical termination was triggered.
At least one commentator has noted that the original purpose for the technical
termination rule was to preclude acquisition of partnerships that held assets
with accelerated depreciation methods.179 However, as the older, shorter,
depreciable lives were eliminated long ago, many of the potential opportunities
for abuse have since been lost to the sands of time, primarily because there are
very few partnerships who still have assets depreciated under the older, shorter
lives, and those few that still have these assets likely have little or no depreciable
basis left in those assets, if for no other reason than the depreciable lives under
the old rules were so short that the assets have been fully depreciated.180
The change is effective for partnership taxable years beginning

after Dec. 31, 2017.181
2. Individual
P.L. 115-97 aimed to simplify the tax code and lower the tax burden as it
pertains to individuals by reducing the number of income tax brackets, setting
new limits for the deduction of business losses for non-corporate taxpayers, and
increasing the exemptions and thresholds for the AMT.
a) Income Tax Rates
The law retained seven tax brackets for individuals, but reduced the top rate
from 39.6 percent to 37 percent.182 For estates and trusts, the five 2017 brackets
179 Federal Taxation of Partnerships and Partners, McKee, Nelson & Whitmire, Section 13.03.
180 For example, commercial real estate that was placed in service in the mid to late 1980s could be depreciated
under Section 168 over 15-19 years but the depreciable life for such property was extended in 1993 to 39 years
with Section 13151(a) of Public Law 103-66.
181 Section 13504(c) of P.L. 115-97.
182 Section 11001(a) of P.L. 115-97.

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were collapsed to four brackets. The table below compares the 2017 tax rates
announced previously by the Internal Revenue Service (IRS) to the new rates
imposed by the law:
For married individuals filing jointly and surviving spouses:
CURRENT TAX RATES REVISED TAX RATES
Taxable Income Tax owed Taxable Income Tax owed

≥$18,650 10 percent of taxable income ≥$19,050 10 percent of taxable income
$1,865, plus 15 percent of the $1,905, plus 12 percent of the
$18,651 - $75,900 $19,051-$77,400
excess over $18,650 excess over $19,050
$10,452.50, plus 25 percent of $8,907, plus 22 percent of the
$75,901 - $153,100 $77,401-$165,000
the excess over $75,900 excess over $77,400
$153,101 - $233,350 $165,001 - $315,000
$233,351 - $416,700 $315,001 - $400,000
the excess over $233,350 excess Over $400,000
$112,728, plus 35 percent of $91,379, plus 35 percent of the
$416,701 - $470,700 $400,001 - $600,000
$131,628, plus 39.6 percent of $161,379, plus 37 percent of
Over $470,700 Over $600,000
the excess over $470,700 the excess over $600,000.
Heads of households:
Taxable Income Tax owed is: Taxable Income Tax owed is:
≥$13,350 10 percent of taxable income ≥$13,600 10 percent of taxable income
$1,335, plus 15 percent of the $1,360, plus 12 percent of the
$13,351 - $50,800 $13,601-$51,800
$50,801 - $131,200 $51,801-$82,500
$131,201 - $212,500 $82,501 - $157,500
$212,501 - $416,700 $157,501 - $200,000
the excess over $212,500 excess Over $157,500
$416,701 - $444,500 $200,001 - $500,000
$126,950, plus 39.6 percent of $149,298, plus 37 percent of
Over $444,550 Over $500,000
the excess over $444,550 the excess over $500,000.

Unmarried individuals, other than surviving spouses and heads of

households:

≥$9,325 10 percent of Taxable Income ≥$9,525 10 percent of taxable income
$932.50, plus 15 percent of the $952.50, plus 12 percent of the
$9,326 - $37,950 $9,526 - $38,700
$5,226.25, plus 25 percent of $4,453.50, plus 22 percent of
$37,951 - $91,900 $38,701 - $82,500
the excess over $37,950 the excess over $38,700
$91,901 - $191,650 $82,501 - $157,500
$191,651 - $416,700 $157,501 - $200,000
the excess over $191,650 the excess Over $157,500
$120,910.25, plus 35 percent $45,689.50, plus 35 percent of
$416,701 - $418,400 $200,001 - $500,000
of the excess over $416,700 the excess over $200,000
$121,505.25, plus 39.6 percent $150,689.50, plus 37 percent
Over $418,400 Over $500,000
of the excess over $418,400 of the excess over $500,000.
Married individuals, filing separate returns:

≥$9,325 10 percent of Taxable Income ≥$9,525 10 percent of taxable income
$932.50, plus 15 percent of the $952.50, plus 12 percent of the
$9,326 - $37,950 $9,526 - $38,700
$5,226.25, plus the excess $4,453.50, plus 22 percent of
$37,951 - $76,550 $38,701 - $82,500
over $37,950 the excess over $38,700
$76,551 - $116,675 $82,501 - $157,500
over $76,550 the excess over $82,500
$116,676 - $208,350 $157,501 - $200,000
over $116,675 the excess Over $157,500
$56,364, plus the excess over $45,689.50, plus 35 percent of
$208,351 - $235,350 $200,001 - $300,000
$208,350 the excess over $200,000
$65,814, plus the excess over $80,689.50, plus 37 percent of
Over $235,351 Over $300,000
$235,350 the excess over $300,000.

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Estates and trusts:

≥$2,550 15 percent ≥$2,550 10 percent of taxable income
$382.50, plus 25 percent of the $255, plus 24 percent of the
$2,551 - $6,000 $2,551 - $9,150
$1,245, plus 28 percent of the
$6,001 - $9,150
excess over $6,000 $1,839, plus 35 percent of the
$9,151 - $12,500
$2,127, plus 33 percent of the excess over $9,150
$9,151 - $12,500
excess over $9,151
$3,232.50, plus 39.6 percent of $3,011.50, plus 37 percent of
Over $12,500 Over $12,500
The effective dates of these changes would be any taxable year beginning after
Dec. 31, 2017, and before Jan. 1, 2026.183 Because the effective date has a built-
in sunset provision (because of legislative process limitations for budgetary
provisions extending beyond 10 years), barring further legislative action,
the tax brackets applicable to individuals will revert to the old tax brackets
beginning in 2026.
b) Limitations on Deducting Business Losses
P.L. 115-97 institutes a new limit for the deduction of business losses for
noncorporate taxpayers.184 The limitation will limit the deduction of business
losses for taxpayers filing joint returns to $500,000 annually ($250,000 for
other taxpayers).185 The limit is adjusted annually for inflation.186
Excess business losses are defined as the excess of aggregate deductions of the
taxpayer’s trades or business over the aggregate income from such trades or
business.187 Partners and S corporation shareholders include their allocable
183 Section 11001(a) of P.L. 115-97.

184 Section 11012 of P.L. 115-97.
185 IRC Section 461(l)(3)(A)(ii)(II), as amended by Section 11012(a) of P.L. 115-97.
186 IRC Section 461(l)(3)(B), as amended by Section 11012(a) of P.L. 115-97.
187 IRC Section 461(l)(3)(A), as amended by Section 11012(a) of P.L. 115-97.

share of the entity’s income and deductions at the partner or shareholder level in
their computation of excess business losses.188
The nondeductible business loss determined for a year is treated as a NOL and
carried forward to future years.189 Because the loss carried forward is treated as
a NOL, it is not subject to this business loss limit in future years, but is limited
to other limitations on NOLs and can offset no more than 80 percent of the
taxpayer’s taxable income in the subsequent tax years.190
The business loss limitation is applied after the application of the passive activity
limitations.191 However, the business loss limitation will likely have limited effect
on passive investors since the passive activity rules preclude a deduction for
a net passive loss in any event. Instead, the business loss limit could severely
affect active investors who would otherwise be able to deduct business losses
before the enactment of P.L. 115-97.
The new limitation on losses for taxpayers other than corporations is effective
for taxable years after Dec. 31, 2017 and before Jan. 1, 2026.192
c) Alternative Minimum Tax–Increased Exemption
P.L. 115-97 increased the individual AMT exemptions and thresholds.193 The
previous individual AMT thresholds, adjusted for inflation, were $54,300 for
single filers and heads of households; $84,500 for married individuals filing
jointly and surviving spouses; and $42,250 for married individuals filing
separately.194 The law increases the exemption amounts as follows: for married
individuals filing jointly or surviving spouses the exemption is $109,400; and
for single filers the exemption is $70,300. The threshold income at which AMT
exemptions are phased out are also increased to $1 million for married filers
188 IRC Section 461(l)(4), as amended by Section 11012(a) of P.L. 115-97.

190 IRC Section 172(a)(2) as amended by Section 11012(a) of P.L. 115-97.
191 IRC Section 461(l)(6), as amended by Section 11012(a) of P.L. 115-97. See IRC Section 469 for the passive activity
loss limitations.
193 Section 12003(a) of P.L. 115-97.

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from $160,900. For single filers, the exemption amount is now $500,000, up
from $120,700.
AMT exemptions phase out by 25 percent of the excess of the AMTI once the
thresholds are hit.195 The AMTI is calculated by adding certain deductions back
into a taxpayer’s income.196 The AMT exemption is then subtracted from the
AMTI to determine the filer’s final taxable income.
The individual AMT’s two tax rates of 26 percent and 28 percent

remain intact.197
The effective dates of these changes to the AMT system are any taxable year
beginning after Dec. 31, 2017 and before Jan. 1, 2026.198

197 IRC Section 55(b)(1)(A)(i)).
198 Section 12003(a) of P.L. 115-97.

Low-Income Housing Tax Credit III
III. Low-Income Housing Tax Credit

During the tax reform legislative process, several proposals were made that
would have introduced dramatic changes to the LIHTC, some of which would
have resulted in significant reductions to the availability of credits and the
associated production of affordable housing. However, in the final legislation,
there were no direct changes to the LIHTC. Instead, several provisions affecting
taxpayers more generally are likely to have an indirect effect on the LIHTC.
A. Volume Cap LIHTCs

One aspect of Section 42 that will be negatively affected is the calculation of
the annual limitation on the aggregate pool of volume cap LIHTCs allocated
to each state LIHTC allocating agency. An annual ceiling is set for each state
LIHTC allocating agency in an amount equal to the greater of $1.75 multiplied
by its respective population or $2 million for the 2002 calendar year.199 For
calendar years after 2002, both the $1.75 and $2 million formula components
are increased by inflation adjustments.200 Now that chained CPI has replaced
the use of CPI for cost-of-living adjustments, the annual ceiling for the aggregate
pool of volume cap LIHTCs will increase at a slower rate than would have
existed if CPI were applied (see section II.A.6. Change to Chained CPI for
additional discussion regarding the change to chained CPI). Although the effect
for any one year is likely to be small, over time, the compound effect of these
minor differences will result in significant aggregate reductions to the amount
of LIHTCs that would have been available using the CPI inflation adjustment.
Ultimately, a smaller pool of aggregate LIHTCs for each state will result in fewer
affordable rental homes in the future.
B. Private Activity Bonds

PABs survived tax reform. But the growth of the volume cap available in
future years for all uses, including for PAB allocations that are used to finance
199 IRC Section 42(h)(3)(C)

200 IRC Section 42(h)(3)(H)

www.novoco.com 41
III Low-Income Housing Tax Credit
LIHTC developments, will be reduced in a manner similar to volume cap

LIHTC developments. The applicable volume cap for PAB available to any state
is the greater of $75 multiplied by the respective state’s population or $225
million for the 2002 calendar year.201 For calendar years after 2002, both the
$75 and $225 million formula components are increased by the cost-of-living
adjustment.202 As is the case with the aggregate pool of volume cap LIHTCs,
the implementation of chained CPI for cost-of-living adjustments will slow the
increase in the annual volume cap for PAB and reduce the amount of future PAB
available for financing future LIHTC developments.
C. Acquisition/Rehabilitation Projects
Another outcome from the use of chained CPI is its effect on the minimum
rehabilitation expenditures required to be incurred to qualify for the credits
for an existing building. An existing building that has been acquired and
rehabilitated must meet a minimum expenditures threshold to qualify for
LIHTCs. Specifically, the amount of rehabilitation expenditures must be
the greater of 20 percent of the adjusted basis of the building before the
commencement of rehabilitation, or $6,000 or more per low-income unit.203
Furthermore, an inflation adjustment is applied to the $6,000 threshold for any
rehabilitation expenditures placed in service for any calendar year after 2009.204
Due to the change to use chained CPI as the inflation adjustment, the $6,000
component of the minimum rehabilitation expenditure threshold calculation
will now increase at a lower rate in the future as compared to the use of CPI
under previous law. This will make it easier for taxpayers that own acquisition/
rehabilitation LIHTC properties to pass the substantial rehabilitation threshold
in future years, assuming that chained CPI continues to trend lower than CPI.
However, as most rehabilitation budgets exceed the $6,000 threshold, and often
by a wide margin, this change is likely to have virtually no effect on the vast
majority of LIHTC properties.
201 IRC Section 146(d)(1)

202 IRC Section 146(d)(2)
203 IRC Section 42(e)(3)(A)(ii)
204 IRC Section 42(e)(3)(D)

D. Effect to Low-Income Housing Tax Credit

from other Amendments in P.L. 115-97
A number of changes in other sections of the law are expected to indirectly affect
LIHTC projects.
1. Reduced Corporate Tax Rate
The corporate tax rate declines from 35 percent to 21 percent for taxable
years beginning after Dec. 31, 2017 (see section II.B.1 Corporate Tax Rate for
additional discussion regarding the reduction to corporate tax rates).205 The
lower corporate tax rate has a dramatic negative effect on the value of LIHTC
investments. LIHTC investors traditionally have enjoyed two primary tax
benefits associated with their investments: claiming the tax credit, as well as
claiming deductions over time equal to their investment. Those deductions
are inherently more valuable when tax rates are higher and less valuable when
tax rates are lower. The change to a lower tax rate results in a reduction in the
amount of equity that an investor will contribute in exchange for a LIHTC
partnership interest. Based strictly on the mathematical reduction in the value
of the deductions stemming from the lower tax rate, the reduction to the overall
amount of the equity for any given partnership is estimated at approximately
14 percent. For tax-exempt bond financed developments and acquisition/
rehabilitation projects, the reduction is greater, but for 9 percent volume cap new
construction projects, the reduction is smaller. Properties receiving additional
LIHTCs from the basis boost will also have a slightly muted effect compared to
those without basis boost LIHTCs.206
The new law repealed the corporate AMT was repealed but instituted the Base
Erosion and Anti-Abuse Tax (BEAT) (see section II.B.3 Base Erosion and Anti-
205 IRC Section 11(b), as amended by section 13001 of P.L. 115-97P.L. 115-97.
206 Novogradac has examined the effect of the lower corporate tax rate on the LIHTC in a number of posts
including, “Final Tax Reform Bill Would Reduce Affordable Rental Housing Production by Nearly 235,000
Homes” from Dec. 19, 2017.

www.novoco.com 43
Abuse Tax for additional discussion regarding the BEAT).207 Similar to the AMT,
the BEAT is a parallel system of taxation. For years beginning after Dec. 31,
2017, domestic and foreign corporations with business in the United States and
abroad must calculate their tax using two different calculations: first, using the
regular corporate income tax; second, using the BEAT. Corporate taxpayers then
pay the higher of the two calculations.
Of paramount importance to the LIHTC is the ability of LIHTCs to offset the

BEAT. Depending on the precise facts and circumstances attributable to any
given corporate taxpayer, LIHTCs may not always offset the BEAT dollar for
dollar. Moreover, the ability of tax credits to offset the BEAT changes over time.
Between 2018 and 2025, only 80 percent of LIHTCs are used in determining a
corporation’s BEAT liability, which means a corporation will generally receive
a benefit from the LIHTC of between 80 percent and 100 percent of their
LIHTCs.208 Additionally, to the extent that credits are available but do not
offset the BEAT, there are no provisions for those credits to be carried forward.
Mathematically speaking, for taxpayers that owe tax under the BEAT between
2018 and 2025, this could result in as much as 20 percent of their LIHTCs
being lost. Beginning in 2026, LIHTCs have zero ability to offset the BEAT.209
Therefore, beginning in 2026, for taxpayers who owe tax under the BEAT, as
much as 100 percent of their LIHTCs could be lost.
Because of this dynamic, investors should carefully size their tax credit
investments to manage their regular tax liability, lest their regular tax liability
is reduced below their BEAT, resulting in lost credits. The BEAT provisions will
potentially affect many tax credit investors, including foreign-owned banks and
many U.S. banks that have a significant foreign presence. This could result in
reduced demand for tax credit investments in the future, as well as a large influx
of secondary market transactions, as existing investors seek to reduce their
tax credit holdings to manage the interplay between their regular income tax
liability and their liability under the BEAT.
207 Section 14401 of P.L. 115-97..

208 IRC Section 59A(b)(1)(B)(ii)(II).
209 IRC Section 59A(b)(2)(B).

3. Business Interest Limitations
Under P.L. 115-97, business interest expense deductions are now limited, with
the limitation applicable to all businesses, including pass-through entities (see
section II.A.2. Business Interest Expense Limitation for additional discussion
regarding this limitation.).210 For 2018-2021, the limitation is equal to 30 percent
of earnings before interest, depreciation and amortization.211 After 2021, the
limitation is equal to 30 percent of earnings before interest.212 This limitation
applies to tax years beginning after Dec. 31, 2017.213
There is a small business exception to the interest expense limitation rules,214

but most LIHTC partnerships will not qualify for the exception, as partnerships
that allocate more than 35 percent of their losses to limited partners or non-
managing limited liability company members will generally not qualify.215
However, because LIHTC partnerships are generally engaged in a real property
trade or business, a one-time irrevocable election out of the business interest
expense deduction limitation is available.216 Many LIHTC partnerships are
expected to make this election. One consequence of making this election is the
required use of the ADS to depreciate certain assets (see section II.A.1 Cost
Recovery Changes for additional discussion regarding the use of ADS lives
under this election).217 The requirement to use ADS lives for taxpayers making
the election is expected to apply to both existing and newly placed in service
residential rental property218 and is effective for taxable years beginning after
Dec. 31, 2017.219
For partnerships that choose not to elect out of the limitations, the calculation of
the limitation on business interest deductions changes over time. Accordingly,
210 IRC Section 163(j), as amended by Section 13301(a) of P.L. 115-97.

211 IRC Section 163(j)(1)(B) and (j)(8), both as amended by Section 13301(a) of P.L. 115-97.
213 Section 13301(c) of P.L. 115-97.
215 IRC Section 163(j)(3), as amended by Section 13301(a) P.L. 115-97, in coordination with IRC Section 448(a)(3),
448(d)(3), 461(i)(3)(B) and 1256(e)(3)(B).
216 IRC Sections 163(j)(7)(B) and (C), as amended by Section 13301(a) of P.L. 115-97.
217 IRC Section 163(j)(9)(A), as amended by Section 13301(a) of P.L. 115-97.
218 Although the statute is silent regarding whether existing property would be required to use ADS lives, informal
discussions with the IRS to date suggest that existing property will be required to use ADS lives. Additional
guidance will be needed to confirm and clarify this requirement.
219 Section 13204(b)(2) of the Tax Cuts and Jobs Act.

www.novoco.com 45
LIHTC partnerships may evaluate the precise timing of making an election out
of the business interest deduction limitations. Some LIHTC partnerships may
find that the calculation of the limitation from 2018-2021 has little or no effect
on their ability to deduct interest currently. For those LIHTC partnerships,
particularly those that are nearing the end of their lifecycle, in some cases with
an expected partnership unwind before 2022 or even shortly thereafter, there
may be little incentive to make the election. Even LIHTC partnerships that are
of relatively recent vintage should evaluate whether mathematically superior tax
outcomes can be achieved by deferring the election until the calculation of the
limitation becomes less favorable in 2022.
The decision to make an election out of the interest limitations is not without
consequence to a LIHTC partnership, as either alternative presents a tradeoff
of both benefits and detriments under any number of different scenarios
and analyses. Some important factors effected by making the election (or
conversely by declining to make the election) include capital accounts, exit taxes
and residual proceeds. LIHTC partnerships will need to perform extensive
scenario modeling to evaluate the effects of making the election based on
their precise situation.
LIHTC partnerships making the election will find that the change to using
ADS lives will likely reduce prospective depreciation deductions, which will
serve to preserve capital accounts. While larger capital accounts generally
can have salubrious outcomes by both reducing (or eliminating) exit taxes as
well as mitigating potential reallocations of tax credits associated with 704(b)
entanglements, larger capital accounts also typically result in increased residual
proceeds to the partner in the event of a sale of the project.
Conversely, LIHTC partnerships that decline to make the election will find
that although depreciation is not affected, the nondeductible interest allocated
to the partners has a curious effect on capital accounts and exit taxes.
Nondeductible interest is allocated to the partners,220 resulting in a reduction
to capital accounts and the partner’s basis in their partnership interest221 (no
different than deductible interest), but the nondeductible interest is carried
220 IRC Section 163(j)(4)(B)(i)(II), as amended by Section 13301(a) of P.L. 115-97.


forward indefinitely at the partner level,222 and added back to their basis in
their partnership interest upon disposition of their partnership interest.223 For
LIHTC partnerships with all or a portion of their interest deductions limited,
this results in the curious situation where a limited partner may have a negative
capital account, yet, arguably, the exit taxes are zero. This outcome occurs
because the nondeductible interest affects capital accounts differently than it
affects the basis of the partner’s interest in their partnership. Nondeductible
interest reduces capital accounts, yet because the cumulative nondeductible
interest is added back to the limited partner’s basis in their partnership interest
in calculating their gain or loss upon disposition, as long as the cumulative
nondeductible interest is greater than the negative capital account, the limited
partner would arguably have zero exit tax. As each partner’s share of residual
proceeds under the partnership agreement are often determined by reference to
the capital accounts before the sale and the limited partner’s capital account is
reduced by the nondeductible interest, the limited partner’s share of the residual
proceeds would likewise be reduced in this situation.
For upper-tier fund partnerships, the deductibility of interest may or may not be
a significant consideration. For many upper-tier fund partnerships, there is little
or no interest expense and those partnerships should therefore not be materially
affected by the limitation. However, some upper-tier fund partnerships do have
bridge loan interest, which commonly exists during the early years of the fund
lifecycle. Often this interest is required to be capitalized rather than deducted
and in these situations, the interest deduction limitation rules would not
apply.224 However, for interest that would otherwise be eligible for deduction, it
is unclear whether interest expense at the fund level is business or nonbusiness
interest expense. If it is business interest expense, it is unclear if such interest
expense is “properly allocable” to the lower-tier real estate activity or if the fund
is eligible to similarly make a real property trade or business election. The IRS
will need to issue guidance regarding tiered partnerships and the deductibility
of interest expense, at a minimum to address anti-abuse concerns. Additionally,
to the extent that lower-tier partnerships allocate excess business income to the
222 IRC Section 163(j)(4)(B)(ii), as amended by Section 13301(a) of P.L. 115-97.

223 IRC Section 163(j)(4)(B)(iii)(II), as amended by Section 13301(a) of P.L. 115-97.
224 Page 387 of the Conference Report for P.L. 115-97, which specifically identifies that Section 163(j) is intended to
apply after the provisions that subject interest to deferral, capitalization, or other limitation.

www.novoco.com 47
upper-tier partnership, that income should be available to offset interest expense

on debt borrowed at the upper-tier partnership. 225
Interest incurred by a LIHTC partnership during construction that is

capitalized to the depreciable basis of the development and included in
eligible basis for the calculation of the LIHTCs should not be affected by the
business interest deduction limitations, as the application of the business
interest deduction limitations is performed after the application of the
interest capitalization rules.226
4. Alternative Depreciation System Lives
P.L. 115-97 also revised the recovery period of residential rental property under
the ADS from 40 years to 30 years (see section II.A.1. Cost Recovery Changes
for additional discussion regarding the change to ADS lives).227 This provision
is effective for property placed in service after Dec. 31, 2017.228 For LIHTC
partnerships that place in service real property after Dec. 31, 2017, and elect
out of the business interest expense deduction limitation, it is quite clear that
the newly placed-in-service property must be depreciated using ADS with a life
of 30 years. One consequence to LIHTC partnership structures resulting from
the shortening of the ADS recovery period from 40 years to 30 years is that the
ability of LIHTC partnerships to manage the timing of depreciation deductions
is hindered. This would leave a LIHTC partnership vulnerable to potential
loss reallocations to the general partner, which could trigger a reallocation of
LIHTCs away from the limited partner as a result of the limited partner’s capital
account eroding at a more accelerated pace.
The applicability of the new 30-year ADS recovery period to buildings previously
placed in service is not as clear as for buildings placed in service after Dec. 31,
2017. This ambiguity is largely driven by the fact that the effective date for the
225 IRC Section 163(j)(4)(A)(ii)(II), as amended by Section 13301(a) of P.L. 115-97.

226 Page 387 of the Conference Report for P.L. 115-97, which specifically identifies that Section 163(j) is intended to
apply after the provisions that subject interest to deferral, capitalization, or other limitation.
227 IRC Section 168(g)(2)(C), as amended by Section 13204(a) of P.L. 115-97.
228 Section 13204(b)(1) of P.L. 115-97.

new ADS lives is for property placed in service after Dec. 31, 2017.229 On its
face, property placed in service before Jan. 1, 2018, would therefore be subject
to the older 40-year ADS lives. Although guidance has not been issued for this
precise fact pattern, previous guidance issued for analogous situations involving
real property previously placed in service that later becomes tax-exempt use
property requires the real property to be depreciated over the remaining
ADS recovery period with appropriate adjustments for “excess” depreciation
previously taken.230 If similar rules apply to the election out of the business
interest limitations, then LIHTC partnerships with real property placed in
service before Jan. 1, 2018, that elect out of the business interest limitation
would depreciate the remaining basis of the real property over the remaining
ADS recovery period. Somewhat intriguingly, the analogous guidance takes a
split approach to concluding whether the change to use ADS lives is treated as
a new placed-in-service event. For situations in which the new depreciable lives
are shorter than the existing lives, a new placed-in-service date is deemed to
occur.231 Conversely, for situations in which the new depreciable lives are longer
than the existing lives, the property is not deemed to be re-placed in service, but
instead is treated as if it had been originally placed in service with the longer
life.232 If similar principles apply to existing buildings owned by taxpayers
making the election out of the business interest limitations, the existing
buildings would therefore be depreciated using a 40-year recovery period in lieu
of the 30-year recovery period that applies to real property placed in service
after Dec. 31, 2017. As a result of electing treatment as an electing real property
trade or business, such LIHTC partnerships would be required to convert
residential rental property from a 27.5-year to a 40-year recovery period. This
would have a substantial reduction in the tax benefits derived from LIHTC
investments due to the dilution of prospective depreciation deductions.
229 Section 13204(b)(1) of P.L. 115-97.

230 Treasury Regulation Section 1.168(j)-1T, Question and Answer 2 and Treasury Regulation Section 1.168(i)-4(d)
(4)(ii).
231 Treasury Regulation Section 1.168(i)-4(d)(3).
232 Treasury Regulation 1.168(i)-4(d)(4).

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5. Bonus Depreciation
The expansion of the bonus depreciation rules presents an opportunity to offset

any potentially negative effects to the calculation of taxable income associated
with other provisions from P.L. 115-97. (The expansion of the bonus depreciation
provisions are outlined in section II. A. 1 Cost Recovery Changes).233 The
new law allows for eligible property, such as site improvements and personal
property, placed in service after Sept. 27, 2017, and before Jan. 1, 2023, to be
100 percent expensed.234 Furthermore, for assets placed in service between
Sept. 27, 2017, and Dec. 31, 2017, a taxpayer may elect to use 50 percent in place
of 100 percent.235 This ability to elect either 50 percent or 100 percent bonus
depreciation on qualifying property provides a LIHTC partnership with an
additional tool to adjust its accelerated deductions, thereby allowing LIHTC
partnerships to navigate the fine line between accelerating deductions and
carefully navigating capital account considerations, all while mitigating some
of the adjustments to taxable income stemming from other provisions
in P.L. 115-97.
In addition to these changes, bonus depreciation is now available for used

property acquired by the taxpayer.236 Previously, only brand new property
qualified for bonus depreciation.237 The change to allow bonus depreciation
for used property presents a unique opportunity for acquisition/rehabilitation
projects. For used properties acquired in anticipation of rehabilitation under the
LIHTC, taxpayers wishing to maximize bonus depreciation will be motivated
to perform cost segregation analysis to properly identify the amount of eligible
property.
233 For additional background on bonus depreciation see Should Old Partnerships Be Amended to Address P.L. 115-
97, Jerry Breed, Corenia Burlingame, March 2018 Novogradac Journal of Tax Credits
https://www.novoco.com/periodicals/articles/should-old-partnerships-be-amended-address-hr-1.
234 IRC Section 168(k), as amended by Section 13201(a) of P.L. 115-97.
235 IRC Section 168(k)(10), as amended by Section 13201(e) of P.L. 115-97.
236 IRC Section 168(k)(2)(A)(ii) and 168(k)(2)(E)(ii), as amended by Section 13201(c) of P.L. 115-97.
237 IRC Section 168(k)(2)(A)(ii), as existed prior to the passage of P.L. 115-97.

6. Repeal of Technical Terminations
Before P.L. 115-97, a sale or exchange of 50 percent or more of the profits and
capital ownership in a partnership triggered a deemed termination of the
partnership,238 with a new partnership being deemed to rise like a phoenix
from the ashes of the old partnership.239 These technical terminations resulted
in a host of potentially nettlesome (and often insalubrious) outcomes to
LIHTC partnerships.
A partnership so terminated was required to file a tax return for the partial
year ending on the termination date, as well as a tax return for the remainder
of the taxable year falling after the termination date. Before P.L. 115-97, a
cascade of technical terminations could also be triggered by a sale of an upper-
tier partnership in a tiered partnership structure.240 It was not uncommon in
tiered LIHTC partnership structures for lower-tier LIHTC partnerships to
be completely oblivious to changes in upper-tier ownership, which although
completely out of the control of the lower-tier LIHTC partnership, could trigger
missed tax return filings and associated late penalties for the lower-tier LIHTC
partnership. In addition to the administrative burden and cost associated with
filing multiple tax returns for a single taxable year, technical terminations
typically resulted in reductions to future depreciation deductions to be claimed
by the partnership, as the assets of the partnership were deemed to be re-
placed in service on the date of the technical termination, no different than if
the taxpayer had purchased the assets instead of purchasing the partnership
interest.241 Following a technical termination, the reduced prospective
depreciation deductions often had a significant effect on the taxable losses
claimed by the LIHTC partnership, which reduced the relative attractiveness of
purchasing a LIHTC partnership interest.
P.L. 115-97 repealed the technical termination rules (see section II.C.1.d.
Changes to Technical Terminations of Partnerships regarding the repeal
238 IRC Section 708(b)(1)(B), as existed immediately prior to the passage of P.L. 115-97.
239 Treasury Regulations Section 1.708-1(b)(4).
240 Treasury Regulations Section 1.708-1(b)(2).
241 IRC Section 168(i)(7), as existed immediately prior to the passage of P.L. 115-97 and the preamble to the
Proposed Regulations that were finalized by TD 8717.

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of technical terminations).242 As such, even changes in LIHTC partnership

ownership approaching 100 percent of the ownership interests are no longer
deemed to trigger a termination in the LIHTC partnership. Due to the
improved tax benefits accruing to a purchaser of a LIHTC partnership (at least
compared to a LIHTC partnership experiencing a technical termination under
prior law), secondary market purchases of LIHTC partnership interests may
become more common.
The repeal of the technical termination rules is effective for tax years beginning
after Dec. 31, 2017.243
7. Year of Inclusion for Gross Income
P.L. 115-97 imposed several new requirements related to accounting methods.

Among them, one provision relates to the taxable year of inclusion for income
(see section II.A.3. Certain Special Rules for Year of Inclusion for additional
discussion regarding the year of inclusion for gross income requirements).244
Under this provision, income recognized by the taxpayer for tax purposes
must be recognized no later than when recognized on the taxpayer’s financial
statements.245 A whole host of provisions and details are also helpfully included
to assist the taxpayer in identifying the precise definition of which financial
statements trigger this requirement.246 A long list of exceptions and special rules
also exist.247
This requirement only applies to taxpayers who use the accrual method for
federal income tax purposes.248 Therefore, cash basis taxpayers are not subject to
this requirement. As many for-profit LIHTC developers use the cash method for
federal income tax purposes, this provision will not apply to those taxpayers and
will therefore not change the timing of recognition of developer fee income for
federal income tax purposes.
242 Section 13504(a) of P.L. 115-97.
243 Section 13504(c) of P.L. 115-97.
244 Section 13221 of P.L. 115-97.
246 IRC Section 451(b)(3), as amended by Section 13221 of P.L. 115-97.
247 IRC Section 451(c), (d), (e), (f), (g), (h), (i), (j) and (k).
248 IRC Section 451(b)(1)(A), as amended by Section 13221 of P.L. 115-97.

For virtually all of the revenue recognized by a LIHTC partnership for

federal income tax purposes, the revenue is recognized no later than on the
partnership’s financial statements. As such, the year of inclusion requirement
is widely believed to not have a significant effect on lower-tier LIHTC
partnerships. However, the application of this requirement is unclear in other
situations, such as to LIHTC investors and their accounting for investments in
tax credit partnerships, particularly in cases such as when an investor uses the
effective yield method of accounting for their tax credit investments on their
financial statements. Accordingly, additional guidance will be needed to evaluate
whether the year of inclusion rules affect the calculation of taxable income
for LIHTC investors.
The year of inclusion requirement is effective for tax years beginning after Dec.
31, 2017.249
8. Taxability of Nonshareholder Contributions to Capital
Before P.L. 115-97, nonshareholder capital contributions to corporations

were generally not subject to tax. Under P.L. 115-97, nonshareholder capital
contributions to corporations will generally no longer be excluded from income
to the extent they are made by a governmental entity or civic group.250 They
generally will be excludable from taxable income to the extent made by such
entity as a shareholder.251
Historically with LIHTCs, grants from governmental agencies would often be

made as nonshareholder contributions to the capital of a for-profit corporation.
In turn, the corporation loaned the proceeds to an LIHTC partnership, with the
corporation having zero tax basis in the loan receivable. The key benefit to this
arrangement was the avoidance of taxable income from the grant, as the receipt
of nonshareholder contributions to capital did not trigger income recognition,
although the repayment of the loan by the LIHTC partnership would trigger
taxable income.
249 Section 13221(c) of P.L. 115-97.


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While grants to for-profit corporations will no longer qualify as non-shareholder

contributions to capital that are exempt from taxation, grants to nonprofits
continue to be an attractive alternative. Under this scenario, a nonprofit entity
would receive the grant and then loan the proceeds to the LIHTC partnership.
As with any other loan to a LIHTC partnership, to be respected as debt, the loan
would need to meet the necessary criteria under federal tax law. Although P.L.
115-97 eliminates some of the structuring flexibility previously enjoyed through
the use of non-shareholder contributions to capital, through proper structuring,
grants should continue to be viable alternatives as a means of closing financing
gaps in developing affordable housing.
The changes to non-shareholder capital contributions to corporations are

effective for contributions made after Dec. 22, 2017, except for contributions
made pursuant to a master development plan approved prior to Dec. 22, 2017, by
any governmental entity.252
252 Section 13312(b) of P.L. 115-97.

Historic Tax Credit and Non-Historic Rehabilitation Tax Credit IV
IV. Historic Tax Credit and Non-Historic

Rehabilitation Tax Credit
The final bill retains the HTC, with modifications, but repeals the non-historic
rehabilitation tax credit for nonresidential pre-1936 properties, subject to
transition rules. Additional clarity will be needed regarding transition rules and
there are other provisions of P.L. 115-97 that will have an indirect effect on the
HTC, particularly the BEAT, as noted below.
A. Statutory Changes to Section 47

Statutory changes to Section 47 include the repeal of the 10 percent
rehabilitation tax credit and the modification of the 20 percent HTC.
1. Repeal of 10 Percent Rehabilitation Tax Credit
Previous to P.L. 115-97, a 10 percent rehabilitation tax credit was available for
qualified rehabilitation expenditures (QREs) taken into account with respect
to any qualified rehabilitated building first placed in service before 1936 and
that is not a certified historic structure. P.L. 115-97 repealed the 10 percent
rehabilitation tax credit.253
The change to eliminate the 10 percent credit for nonhistoric buildings is

effective for QREs paid or incurred after Dec. 31, 2017, subject to certain
transition rules as described below.254
253 Section 13402 of P.L. 115-97. Pursuant to this section, IRC Section 47(c)(1)(B) was eliminated and IRC Section
47(a) was substantially revised to eliminate references to the 10% credit. These provisions had previously
provided for the 10% rehabilitation tax credit for buildings placed in service prior to 1936.
254 Section 13402(c) of P.L. 115-97.

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IV Historic Tax Credit and Non-Historic Rehabilitation Tax Credit
2. Modification to 20 Percent Historic Rehabilitation Tax Credit
Under P.L. 115-97, the 20 percent HTC applicable to QREs for certified historic
structures was retained, although in modified form. Under prior law, QREs with
respect to any qualified rehabilitated building were taken into account for the
taxable year in which such qualified rehabilitated building is placed in service,
effectively meaning that the HTCs were claimed in full when the property was
placed in service. However, under the new law, HTCs will be claimed ratably
over five years.255 More specifically, the ratable share of HTCs for any taxable
year during the five-year period beginning in the taxable year in which the
qualified rehabilitated building is placed in service is the amount equal to 20
percent of the QREs with respect to the qualified rehabilitated building, as
allocated ratably to each year during such five-year period.256
The wording of this provision leaves questions around the precise calculation
of the credits to be claimed in each year, particularly in the first year. One
possible interpretation would allow the taxpayer to claim one-fifth of the total
HTC in the year the building is placed in service and then one-fifth each year
for the next four taxable years. Alternatively, one other possible interpretation of
this provision could require that calculations be pro-rated based on a monthly
convention, under which taxpayers pro-rate the first year credit amount based
on the placed in service date, with the difference between one-fifth of the
total HTC and the prorated amount claimed in Year 6. The following table
summarizes the differences between these two alternatives, assuming a placed-
in-service date of Oct. 1, 20x1:
YEAR 1/5 CLAIMED EACH YEAR MONTHLY CONVENTION
20x1 20 percent 5 percent (3 months = 25 percent of 20 percent)

20x2 20 percent 20 percent
20x6 0 percent 15 percent (9 months = 75 percent of 20 percent)
255 IRC Section 47(a)(1), as amended by Section 13402(a) of P.L. 115-97.

256 IRC Section 47(a)(2), as amended by Section 13402(a) of P.L. 115-97.

While other calculation methodologies are certainly possible, these two methods
have been hypothesized as the most likely interpretations.
With the credit taken over five years, the timing of the associated basis reduction
is unclear.257 Two approaches would be to either reduce basis by the full amount
of the credit at placed in service, even though the credit is claimed over five
years, or reduce basis as the credit is claimed. The statute states that the “basis
of such property shall be reduced by the amount of the credit so determined.”258
Arguably, the amount of the credit is “determined” at placement in service, such
that the basis reduction would occur at that date. Conversely, one could argue
the credit is determined as it is claimed. If this latter interpretation prevails,
then the precise methodology for calculating depreciation in any given year is
subject to any number of possible interpretations and complexities. Guidance
will be needed as to the proper timing of the basis reduction and if basis is
reduced over time, the associated calculation of depreciation.
The basis reduction requires a corresponding adjustment to a partner’s

capital account. If the basis reduction is recognized over five years, then the
corresponding adjustment to a partner’s tax basis and 704(b) capital accounts
would generally occur over five years. The allocation of tax losses between the
investor and developer partners in a single-tier transaction structure could
shift significantly from historical practice.259 Comparing and contrasting the
application of these rules as existed under former law compared to under P.L.
115-97, particularly as it relates to the effect on the allocation of tax losses
between the partners results in some unexpected consequences. Therefore,
assuming this structure, with credits claimed at placed in service under former
law and assuming the property is financed with recourse debt, the applicable
basis reduction would reduce the investor’s capital account to zero or negative
257 IRC Section 50(c). Additionally, see the Historic Rehabilitation Tax Credit Handbook for a complete discussion
of the basis reduction provisions.
258 IRC Section 50(c)(1).
259 Historically, many tax practitioners have reduced the 704(b) capital account by the full amount of the basis
reduction in the placed-in-service year. However, some practitioners believe the proper treatment under prior
law is a ratable five-year reduction coinciding with the basis restoration that would occur under IRC Section
50(c) upon an event of recapture. Under P.L. 115-97, it appears the calculation of the annual reduction would
be notably more complex, given the complexity of the recapture rules. The discussion here contrasts the effect
on 704(b) capital accounts under P.L. 115-97 if the basis reduction is spread over five years, with the treatment
under prior law assuming the 704(b) capital account was reduced by the full amount of the basis reduction in the
placed-in-service year.

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when the credits are claimed. As a result, in this scenario, due to the application
of the limitations on a partnership in allocating tax losses to its partners,260
future tax losses would be required to be reallocated to the developer. Moreover,
in situations where the investor’s capital account is driven negative due to the
basis reduction, the result is generally an allocation of gross income to the
investor until its capital account is increased to zero. Now under P.L. 115-97, if
the basis reduction is spread over five years, the investor’s capital account will
decline more gradually. Accordingly, the partnership will have the flexibility to
allocate losses to the investor in the early years of the development lifecycle until
the investor’s capital account reaches zero.
As a consequence, for developments claiming credits over five years, the

investor may find that it receives large loss allocations in the first few years of
its investment, followed by large allocations of income from qualified income
offset provisions as the last few years’ basis reduction is recognized (i.e. after
the investor’s capital account reaches zero from the combination of tax loses and
basis reduction). Among the many critical negotiating and structuring points
in a single-tier transaction will be tax equivalency payment requirements are
likely to be affected by these changes to the income and losses recognized each
year among the partners. As such, HTC transaction parties should fully consider
and analyze projected taxable losses and income allocations and their interplay
with capital account balances in light of the five-year ratable recognition of the
basis reduction.
For transactions involving leases where the tax credit is passed through to the
lessor, the changes to the timeline for recognizing 50(d) income are similarly
unclear. One possibility includes recognizing 50(d) income on the same timeline
as under the old regime when credits were claimed at placed in service. Another
alternative involves phasing in the 50(d) income each year as each slice of
credits is recognized for that year. Additional guidance will be needed to
clarify the appropriate timeline for recognizing 50(d) income for HTCs claimed
ratably over five years.
260 See IRC Section 704(b) and the Treasury Regulations thereunder, for a discussion of these limitations.

Tax equivalency payments to the investor for taxable income allocations have
long been a feature that is aggressively negotiated in HTC transactions. Because
of the cost associated with allocating income to an investor, many development
sponsors have worked tirelessly to structure transactions in a fashion that
introduces features to limit the allocation of taxable income to the HTC investor.
With the reduction in corporate tax rates to 21 percent and with the top
individual marginal rates remaining relatively high at 37 percent, this dynamic
may change, as interesting opportunities for sharing of taxable income may now
exist. For development sponsors who are individuals, there may be a compelling
tax rate arbitrage opportunity, whereby an allocation of taxable income to
the HTC investor results in a tax equivalency payment equal to 21 percent
of the taxable income, whereas taxable income allocated to the development
sponsor could be taxed as high as 37 percent (the top individual rate, before
consideration of other possible tax incentives).
The change to a five-year schedule for claiming credits is applicable to QREs

paid or incurred after Dec. 31, 2017, subject to certain transition rules as
described below.261
3. Transition Rule
An exception to the Dec. 31, 2017, effective date to both of the changes outlined
above is provided in the transition rule. Buildings that meet the transition rule
may continue to claim HTCs under the provisions that existed before P.L. 115-
97. To qualify for the transition rule, a building must meet two criteria: 1) the
building must be owned or leased by the taxpayer during the entirety of the
period after Dec. 31, 2017,262 and, 2) the 24-month (or 60-month) period must
begin not later than 180 days after the enactment of P.L. 115-97.263
As the enactment date was Dec. 22, 2017, a taxpayer is required to select a start
of the 24- (or 60-) month measurement period no later than June 21, 2018
(which is 180 days from the enactment date). Thus, any QREs paid or incurred
261 Section 13402(c) of P.L. 115-97.

262 Section 13402(c)(2)(A) of P.L. 115-97.
263 Section 13402(c)(2)(B) of P.L. 115-97.

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for such buildings during that 24- (or 60-) month period as well as expenditures
paid or incurred through the end of the tax year that this 24- (or 60-) month
period ends would qualify for the transition rules. Thus, for taxpayers using
a calendar tax year, a taxpayer’s expenditures paid or incurred through Dec.
31, 2020 (for a 24-month rehabilitation), or Dec. 31, 2023 (for a 60-month
rehabilitation), would be eligible for HTCs under the rules that existed before the
enactment of P.L. 115-97.
However, the transitional rules raise several questions. The questions primarily
revolve around the requirement for ownership or leasing before Dec. 31, 2017.
First, it is unclear precisely which entity is required to own or lease the property.
Second, it is also unclear whether merely meeting one of those standards is
sufficient, or whether in the case of a lease pass-through transaction, ownership
AND a master lease are both required before Dec. 31, 2017. Finally, changes to
the structure and various agreements are often likely to occur as transactions
move toward implementing their final structure subsequent to Dec. 31, 2017; it
is unclear whether those changes might disturb the ability of the development to
qualify under the transition rules.
In a lease pass-through structure involving a master landlord and a master

tenant, the determination as to which entity or entities need to satisfy the
ownership or leasing requirement is unclear. There are at least two possible
interpretations. Applying the most conservative interpretation of the transition
rules would result in a requirement that both the master landlord and the
master tenant be formed, with ownership of the property by the master landlord
and a master lease from the master landlord to the master tenant. Helpfully,
statements made during the legislative process by Sen. Bill Cassidy, R-La., on
the Senate floor that are noted in the Congressional Record suggest that merely
having the master landlord in place and owning the property by Dec. 31, 2017,
should be sufficient.264 Much of the industry has coalesced around the conclusion
that a master landlord with either ownership of the property or a long-term
leasehold interest in the property will meet this standard. However, absent more
specific guidance on this topic, this conclusion is not free from doubt. Rather
dishearteningly, as the deadline for meeting the transition requirements has
264 Congressional Record–Senate Dec. 1, 2017 pg. S7698.

already passed, assuming that guidance is subsequently issued on this topic,

developments wishing to meet the transition rules have virtually no ability to go
back in time to rearrange their facts to meet the requirements.
The transition rules require that the building must be owned or leased during
the entirety of the period after Dec. 31, 2017.265 As it is common for revisions to
be made to various existing agreements as part of the closing process, taxpayers
meeting the transition rules must be very careful not to disturb the agreements
that establish the taxpayer’s ownership of or leasehold interest in the building.
In the event that these agreements were revised or amended, such revisions or
amendments might cause the taxpayer to fail to meet this requirement, thereby
invalidating the taxpayer’s qualifications for the transition rules.
B. Effects to Historic Tax Credit from other

Amendments in P.L. 115-97
A number of changes in other sections of the law are expected to indirectly affect
HTC transactions.
1. Modifications to Section 179 Rules for Election to

Expense Certain Depreciable Business Assets
Revisions to the Section 179 expensing rules expand the definition of qualified
real property eligible for immediate expensing (see section II.A.1 Cost Recovery
Changes of this Resource Guide for additional discussion regarding the
modifications to the 179 expensing rules). Qualified real property includes
a number of assets, such as QIP and any of the following improvements to
nonresidential real property placed in service after the date such property was
first placed in service: roofs; heating, ventilation and air-conditioning property;
fire protection and alarm systems; and security systems.266
265 Section 13402(c)(2)(A) of P.L. 115-97.

266 IRC Section 179(f), as amended by Section 13101(b)(2) of P.L. 115-97.

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Important limitations and phaseouts apply to 179 deductions, which could limit
the ability of any given taxpayer to claim the 179 deduction for these costs.267
Although these limitations have been raised under P.L. 115-97,268 when it comes
to large taxpayers with significant fixed asset additions across multiple entities,
these limitations are likely to severely curtail or even eliminate their ability to
use 179 deductions. Additionally, because these limitations are applied not just
at the partnership level, but also on an aggregated basis at the ultimate taxpayer
level,269 depending on the facts and circumstances in any given year for any
given taxpayer, many taxpayers may find that they do not qualify.
However, to the extent that taxpayers are eligible for and choose to expense
these costs under Section 179, to prevent double dipping, these costs would not
qualify as QREs.270 As such, taxpayers will have to carefully select between
electing to expense such costs under the new Section 179 rules or including such
costs in QREs.
2. Modifications to Depreciation Rules 271
Various changes to the depreciation rules will potentially affect the calculation
of taxable income for HTC properties. First, there are several changes to the
bonus depreciation rules (see section II.A.1.b. 100 percent Bonus Depreciation of
this Resource Guide for additional discussion regarding the modifications to the
bonus depreciation rules). In general, the changes result in 100 percent bonus
depreciation, with phaseouts for years after 2022.272 However, if a taxpayer takes
100 percent bonus depreciation for a particular cost, then that cost cannot be
included in QREs.273 In the case of HTC properties, this issue is particularly
salient for QIP (see below), as QIP generally qualifies for bonus depreciation and
is also usually largely includable in QREs.
267 See IRC Section 179(b) for a full list of the limitations and phase-outs that apply.
268 Section 13101 of P.L. 115-97.
269 See IRC Section 179(d)(8), along with (d)(6), both of which require aggregation of activities for controlled
groups, partnerships and S-corporations when applying the limitations imposed by IRC Section 179(b).
270 IRC Sections 179(a) and 47(c)(2)(A). Costs treated as an expense under IRC Section 179 are, by definition, not
chargeable to capital account, whereas to qualify as a QRE, a cost must be properly chargeable to capital account.
271 Section 13204 of P.L. 115-97.
272 For a more thorough discussion regarding the changes to the bonus depreciation provisions, please see Section
II.A.1 Cost Recovery Changes of this Resource Guide.
273 Treasury Regulation Section 1.168(k)-1(f)(10).

In addition to the changes to bonus depreciation, the qualified leasehold

improvement property (QLIP) category with respect to nonresidential real
property is eliminated. Before P.L. 115-97, QLIP was depreciated over a 15-year
recovery period. The elimination of this definition helpfully eliminates historical
ambiguity regarding whether or not the majority of QREs would automatically
be QLIP and thus be subject to the shorter depreciable lives by virtue of the
master lease, along with other qualifying criteria.
Although QLIP was eliminated by P.L. 115-97, the QIP category (which
previously included QLIP as a subset) was retained and enhanced (see section
II.A.1. Cost Recovery Changes of this Resource Guide for additional discussion
regarding QIP).274 QIP includes any improvement to an interior portion of a
building that is nonresidential real property, with a few notable exceptions,
provided the improvements are placed in service after the date the building
was first placed in service.275 For nonresidential HTC buildings, there will likely
be substantial amounts of QIP. Based on the conference report, QIP should
have a general 15-year recovery period,276 and use the straight-line method of
depreciation.277 However, due to a drafting omission in P.L. 115-97, the recovery
period for QIP was not defined, which leaves this class of property in limbo
and could result in a 39-year recovery period.278.279 If QIP is subject to a 15-year
recovery period, then it is also eligible for 100 percent bonus depreciation.280
Before P.L. 115-97, QIP had a 39-year recovery period.
The changes to the depreciation rules have implications for HTC properties, not
just as it relates to the calculation of depreciation deductions for any given year,
274 See Section 13204 of P.L. 115-97.
275 IRC Section 168(e)(6)(A), as amended by Section 13204(a)(4)(B) of P.L. 115-97.
276 P.L. 115-97 inadvertently omitted the change to the statute to include qualified improvement property in the
15-year recovery period. The conference report does specify that a 15-year recovery period is intended to apply
to qualified improvement property. A technical correction or additional guidance may be needed to correct this
omission from in the statute.
277 IRC Section 168(b)(3)(G), as amended by Section 13204(a)(2)(B) of P.L. 115-97.
278 Treasury has suggested in informal comments that it lacks the regulatory ability to impose the 15-year recovery
period, notwithstanding the clear legislative intent outlined in the conference report. As qualified improvement
property relates to building improvements for nonresidential real property, 39 years would be the logical
recovery period in lieu of a shorter life that was intended to be memorialized in the statute.
279 Although IRC Section 168 was inadvertently not modified to specifically provide for 15 years as the recovery
period for QIP, the conference report to P.L. 115-97 specifically references 15 years. A technical corrections bill
is expected to address this oversight. Although whether a technical corrections bill will be signed, and precisely
when, is unknown, in the interim, technical guidance may be issued by Treasury that would prescribe 15 years as
the recovery period for QIP.
280 IRC Section 168(k)(2)(A)(i)(I), assuming that QIP is properly depreciable using a 15-year recovery period.

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but also as it relates to the calculation of 50(d) income for lease pass-through
structures.281 Section 50(d) income is required to be recognized over the shortest
recovery period that could be applicable with respect to that property.282
Therefore, for nonresidential HTC buildings that include QIP, to the extent that
the QIP is eligible to be depreciated over 15 years, then the associated Section
50(d) income must be recognized over 15 years. This will, in turn and when
applicable, have implications on tax equivalency payments required to be made
to tax credit investors as stipulated in partnership or operating agreements.
The QLIP and QIP provisions are applicable to property that is placed in service
after Dec. 31, 2017.283
3. Modifications to Business Interest Deductions 284
regarding this limitation).285 The limitation on the deduction of business interest
expense has the potential to negatively affect the timing of when interest
expense is deducted. In a traditional HTC structure, project debt and therefore
interest deductions are primarily located at the property owner (under a single-
tier transaction structure) or the master landlord (under a lease pass-through
structure) (collectively fee owner). Before the enactment of P.L. 115-97, the fee
owner could deduct all interest expense on all loans, which would help to reduce
any taxable income otherwise generated by the fee owner.
Under P.L. 115-97, the deduction of business interest is limited to the sum of
business interest income for the taxable year and 30 percent of the adjusted
taxable income reported during the tax year. For 2018-2021, the limitation is
281 See the Historic Rehabilitation Tax Credit Handbook for a complete discussion of the 50(d) income recognition
provisions.
282 Treasury Regulations Section 1.50-1T(b)(2)(i).
283 Section 13204(b) of P.L. 115-97.
284 Section 13301 of P.L. 115-97. See Section II.A.2 Business Interest Expense Limitation of this Resource Guide for
a more complete discussion of the business interest deduction limitations.

equal to 30 percent of earnings before interest, depreciation and amortization.286

After 2021, the limitation is equal to 30 percent of earnings before interest.287
This limitation is not merely applied at the ultimate taxpayer level, but is also
applied at the partnership level.288
Considerable analysis will be needed to identify precisely how this limitation

applies to each HTC structure. Several exemptions and elections exist that
could eliminate or reduce the applicability of the limitation to any given
HTC structure.
First, disregarded entities are not subject to the limitation, at least not at the
disregarded entity level. Instead, the disregarded entity’s owner would need
to evaluate whether it can deduct the interest. This evaluation would be done
at the owner’s level and would include all of the owner’s activity rather than
just that of the disregarded entity. Although disregarded entities have not
commonly been used in recent years in lease pass-through HTC structures for
the fee owner, the use of disregarded entities may be one strategy to consider
to address this limitation.
There is a small business exception to the interest expense limitation rules

for entities with less than $25 million in average gross income for the past
three years.289 The measurement of gross income includes aggregation rules,
whereby several different ownership structures require aggregation of gross
receipts for purposes of considering whether the taxpayer meets this threshold.
Those ownership structures requiring aggregation include a controlled group
of corporations, partnerships that are under common control and affiliated
service groups.290 This limitation may or may not apply to any given fee owner,
depending on the taxable entity status and ownership structure of the fee owner.
In a lease pass-through transaction structure, master landlords structured as
corporations may qualify for this exception, assuming their gross income (after
the application of the aggregation rules noted above) falls below the threshold.
286 IRC Section 163(j)(1)(B) and (j)(8), both as amended by Section 13301(a) of P.L. 115-97.
289 IRC Section 163(j)(3), as amended by Section 13301 (a) of P.L. 115-97 and in coordination with IRC Section
448(c).
290 IRC Section 448(c)(2), which references IRC Sections 52(a) and (b) and 414(m) and (o).

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Conversely, master landlords structured as partnerships may or may not qualify

for this exception, depending on their ownership structure. More specifically,
partnerships generally do not qualify for the exception if they allocate more
than 35 percent of their losses to limited partners or nonmanaging limited
liability company members.291 For single-tier transaction structures, most
likely will not qualify as the investor partner or investor member would
generally be considered a limited partner and thus the entity would not
qualify for this exception.
Finally, real property trades or businesses have the option to make an election
out of the interest deductibility limitations, although once made, the election
is irrevocable.292 Most fee owner entities are likely to qualify as real property
trades or businesses. The election would exempt the fee owner entity from
the interest expense deduction limitation, but would require the use of the
ADS to depreciate real property and QIP293 (see section II.A.1.c Real Property
Depreciable Lives for additional discussion regarding the use of ADS lives under
this election). For nonresidential real property that would ordinarily be subject
to a 39-year depreciable life under the GDS, shifting to 40 years under ADS
should be a relatively small change. Similarly, for residential rental property,
the change from 27.5 years under the GDS to 30 years under ADS may be
relatively insignificant. However, as QIP would face a somewhat larger shift from
15 years under the GDS to 20 years under ADS, the changes to the calculation
of taxable income triggered by the use of ADS lives are not entirely trivial.294
For fee owners who cannot otherwise avoid the limitation to business interest
deductions through carefully managing their taxable structure or ownership
features, the decision to elect out of the limitation will likely be an exercise in
mathematically weighing the overall shifts in taxable income associated with
the tradeoffs between deducting interest currently and using the ADS lives to
depreciate real property and QIP.
291 IRC Section 163(j)(3), as amended by Section 13301(a) of P.L. 115-97, in coordination with IRC Section 448(a)
(3), 448(d)(3), 461(i)(3)(B) and 1256(e)(3)(B).
293 IRC Section 168(g)(1)(F), as amended by Section 13204(a)(3)(A) of P.L. 115-97.
294 As detailed earlier in section II.A.1.c Real property depreciable life, P.L. 115-97 intended that 168(g)(3) would
identify qualified improvement property as 20-year property for ADS purposes by reference to qualified
improvement property included in IRC Section 168(e)(3)(D)(v), but IRC Section 168(e)(3)(D)(v) was inadvertently
omitted during the legislative drafting process. A technical correction or additional guidance may be needed to
correct this error in the statute. Absent a technical correction, the ADS life for qualified improvement property
will be 40 years.

For fee owners who are subject to the limitations, the calculation of the
limitation on business interest deductions changes over time. Accordingly, the
fee owner will need to evaluate the most beneficial time to make an election
out of the business interest deduction limitations. Some fee owners may find
that the calculation of the limitation for tax years 2018-2021 has little or no
effect on their ability to deduct interest currently. In other words, for these
years, fee owners may find that the calculated interest limitation is greater than
their actual interest deductions. Thus, for those fee owners, there may be little
incentive to make the election. The bottom line is fee owners should evaluate
whether mathematically superior results can be achieved by deferring the
election until the calculation of the limitation becomes less favorable in 2022.
If the fee owner is subject to the interest deduction limitations, then in many
ways, the loss of the deduction results in a deferral of the timing of the tax
benefit. Under the mechanics of the limitation, the partner’s basis in the
partnership is still reduced by the amount of interest expense that wasn’t
deducted. However, upon disposition, the partner’s basis is increased by
the amount of interest expense carried forward that hasn’t been deducted.
This increase in partnership basis basically allows the taxpayer to claim the
deduction at the time of the sale, by virtue of a reduction in any gain on sale
(or increase in loss on sale) that might otherwise apply. A lack of a deduction
for interest expense at the fee owner level would result in the fee owner
experiencing a taxable income increase in the early years, only to be offset
by a smaller gain upon exit (or a larger loss), which would reduce the present
value of the tax benefits accruing to the owners of any fee owner subject to the
limitations on interest deductions.
The decision to make an election out of the interest limitations is not without
consequence to a fee owner, as either alternative presents a tradeoff of both
benefits and detriments under any number of different scenarios and analyses.
In general, in HTC transactions, the focus of when to make such an election is
on evaluating the impact to taxable income or loss of the fee owner. The benefits
or burden of this will primarily affect the developer/owner, with much less of an
impact to the tax credit investor. For example, in lease pass-through transaction
structures, interest and depreciation deductions have a very limited impact on
the taxable income (loss) of the master tenant entity because of the relatively

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small ownership interest the master tenant would have in the master landlord.
Also, in single-tier structures, due to loss allocation limitations resulting in
loss reallocations (including interest deductions) to the general partner, the
developer would also bear the brunt of the limitation, because the portion of
those losses associated with the nondeductible interest would not be currently
deductible. Therefore, fee owners will need to perform extensive scenario
modeling to evaluate the effects of making the election and to evaluate the
timing of making such an election based on their precise situation.
One possible unintended consequence for electing partnerships due to longer

required ADS lives relates to the term of the master lease in a lease pass through
transaction structure for residential property. The lease term of the master
lease generally is structured to equal or exceed 80 percent of the class life of the
building or 22 years for a residential building (i.e. 80 percent of 27½ years). A
lessor and lessee may agree to treat the lessee as having incurred all or a portion
of the rehabilitation expenditures incurred by the lessor for property under
a long-term lease, although such treatment generally requires a lease term in
excess of 80 percent of the class life of such property.295 However, when the fee
owner elects out of the interest deduction limitations, a recovery life of 30 years
applies to the residential building (if placed in service on or after Jan. 1, 2018).
Based on these facts, it is unclear whether class life in such situations would
be considered the Modified Accelerated Cost Recovery System (MACRS) class
life of 27.5 years or the required ADS life of 30 years. For projects structured
to meet the 80 percent requirement based on a 27.5-year class life, a change to
use 30 years for the class life could result in the lease term being less than 80
percent of the class life, therefore resulting in a short-term lease,296 which would
result in a reduction to the HTCs. Although most practitioners understand that
the term “class life” for purposes of this analysis refers to the MACRS recovery
period and not the ADS recovery period, this conclusion is not without doubt. To
address this uncertainty, some fee owners may choose to structure the master
lease term for residential rental projects for a minimum of 24 years (80 percent
of 30 years) rather than the more traditional 22 years.
295 Treasury Regulation 1.48-4(a)(1)

296 Treasury Regulation 1.48-4(a)(2)


taxable years beginning after Dec. 31, 2017.297
The BEAT is a new tax intended to apply to multinational corporations that

make cross-border payments to affiliates (see section II.B.3. Base Erosion
and Anti-Abuse Tax of this Resource Guide for a more complete discussion of
the BEAT provisions). The BEAT is likely to apply to many of the largest HTC
investors. The BEAT, 298 will likely affect a prospective HTC investor’s ability
to use the HTCs, thereby reducing their appetite for HTCs. To the extent tax
credits reduce a taxpayer’s regular income tax below their tentative BEAT, those
tax credits are treated as used and lost, even though those tax credits did not
actually reduce the taxpayer’s tax liability. For example, for a taxpayer whose
regular income tax and BEAT owed were precisely equal before applying HTCs
and that taxpayer was eligible to claim $10 million in HTCs, then those $10
million in HTCs, because they lower the regular tax below their BEAT, would be
considered used and lost, even though those tax credits did not actually reduce
the taxpayer’s tax liability because they will have to pay the BEAT. Therefore,
investors should carefully size their HTC investments to carefully manage
their regular tax liability, lest their regular tax liability is reduced below their
BEAT, resulting in lost credits. The BEAT provisions will affect a broad swath
of HTC investors, including foreign owned banks and many U.S. banks that
have a significant foreign presence. This could result in reduced demand for tax
credit investments in the future, as well as a large influx of secondary market
transactions for projects previously closed but for which construction has not yet
been completed, as existing investors seek to reduce their tax credit holdings to
manage the interplay between their regular income tax liability and their BEAT.
297 Section 13301(c) of P.L. 115-97.

298 Section 14401 of P.L. 115-97.

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V New Markets Tax Credit
V. New Markets Tax Credit

There were attempts to repeal the remaining two annual rounds of the NMTC
during the tax reform legislative process, but ultimately, the credit was
unchanged. There are, however, several provisions of P.L. 115-97 that will have
indirect effects on the NMTC.
A. Statutory Changes to Section 45D

Initial versions of P.L. 115-97 proposed the elimination of two rounds of funding
for the NMTC. Instead, no statutory changes were ultimately made to Section
45D, either for good or ill. As a result, the 2017, 2018 and 2019 rounds, originally
legislated by the Protecting Americans form Tax Hikes (PATH) Act of 2015,
remain undisturbed at $3.5 billion each. During Senate Finance Committee
hearings, Sen. Ben Cardin, D-Md., offered an amendment that included
making the NMTC an indefinite part of the Internal Revenue Code. While the
amendment failed to pass along party lines, several Republican senators spoke
highly of the NMTC, including Chairman Orin Hatch, R-Utah, and Sen. Rob
Portman, R-Ohio. Several Republican senators offered support to their fellow
Democrat senators’ efforts and expressed their commitment to make the NMTC
an indefinite part of the tax code in future tax legislation, such as in a future tax
extenders package. The timing or likelihood of an extenders package is unknown
but this type of public support is positive for the longevity of the NMTC and the
low-income communities it serves.
B. Effects to New Markets Tax Credit from

other Amendments in P.L. 115-97
A number of changes in other sections of the law are expected to indirectly
affect NMTC transactions. Each of these changes will have to be evaluated and
weighed by investors, community development entities (CDEs) and qualified
active low-income community businesses (QALICBs) as they make critical
ongoing decisions whether to invest in tax credits and more specifically in
NMTCs. These decisions will affect past, present and future transactions. They

New Markets Tax Credit V
will also affect the strategies discussed in NMTC applications, as structures

change to accommodate these changes and prevent as much erosion in the value
of the NMTCs as possible. While other tax credits may be more affected by
some of these and other changes, it’s likely that the effect on NMTC pricing will
be subdued. If so, this will bring a tremendous sigh of relief from low-income
communities across the country that benefit from the much-needed investments
that NMTCs provide.
1. Reduced Corporate Tax Rate
The corporate tax rate declines from 35 percent to 21 percent for taxable
years beginning after Dec. 31, 2017 (see section II.B.1 Corporate Tax Rate for
additional discussion regarding the reduction to corporate tax rates).299 Although
this one provision has a dramatic negative effect on the value of investments
in other credits, the impact on NMTC is positive, albeit only very slightly so.
Because the NMTC includes a basis reduction associated with claiming the
credit, the credit itself is often referred to as a taxable credit. The taxable nature
of the credit traditionally causes investors to recognize a gain upon exiting their
NMTC investment. Due to the reduction in the corporate tax rate, this gain
will be taxed at a lower rate and therefore provide a small benefit over prior
tax law. The change is not likely to have a significant effect on pricing of NMTC
investments and any small benefit from this change is likely to be offset by other
changes associated with the new law.
While the corporate alternative minimum tax was repealed, a new, similar
taxation system, the BEAT300 was created (see section II.B.3 Base Erosion and
Anti-Abuse Tax for additional discussion regarding the BEAT). The BEAT is
intended to impose a minimum tax on international corporations that deduct for
U.S. tax purposes payments to foreign subsidiaries and related parties. NMTC
investors will have to determine how this new taxation system will affect their
299 IRC Section 11(b), as amended by section 13001 of P.L. 115-97.

300 Section 14401 of P.L. 115-97.

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ability to use NMTCs. If a prospective NMTC investor is affected by the BEAT,

they will have less appetite for NMTCs.
To the extent NMTCs reduce a taxpayer’s regular income tax below their
tentative BEAT, those tax credits are treated as used and lost, even though those
tax credits did not actually reduce the taxpayer’s tax liability. For example,
consider a taxpayer whose regular income tax and BEAT owed were precisely
equal before applying NMTCs and the taxpayer was eligible to claim $10 million
in NMTCs. The $10 million in NMTCs, because they lower the regular tax below
their BEAT, would be considered used and lost–even though those tax credits
did not actually reduce the taxpayer’s tax liability–because they will have to pay
the BEAT. This treatment of NMTCs means that the BEAT has the potential to
erode 100 percent of a NMTC investor’s benefit.
Other tax credits, such as LIHTCs and RETCs, receive more favorable
treatment, which may affect the types of tax credit investments an investor
is willing to make. Therefore, investors should carefully size their NMTC
investments to carefully manage their regular tax liability, lest their regular
tax liability is reduced below their BEAT, resulting in lost credits. The BEAT
provisions will affect a broad swath of NMTC investors, including foreign-
owned banks and many U.S. banks that have a significant foreign presence.
This treatment of NMTCs in the BEAT calculation will not only have an effect
on future investments but may also affect current investments. NMTC investors
that have already invested in tax credits but are unable to use them due to BEAT
limitations will likely attempt to sell their NMTC investments. This could result
in reduced demand for tax credit investments in the future, as well as a large
influx of secondary market transactions as existing investors seek to reduce
their tax credit holdings to manage the interplay between their regular income
tax liability and their BEAT.
The BEAT provisions of P.L. 115-97 are effective for tax years beginning
after Dec. 31, 2017.301
301 Section 14401(e) of P.L. 115-97.

3. Business Interest Expense Limitations
regarding this limitation).302 The limitation on the deduction of business interest
expense has the potential to negatively affect some NMTC investors, especially
those that invest in an investment fund that claims interest deductions, such
as leverage loan interest expense. Before the enactment of P.L. 115-97, in most
leveraged NMTC structures, an investor would deduct all interest expense,
which would typically offset income allocated to the investment fund by the
CDE. Under P.L. 115-97, the deduction of business interest is limited to the sum
of business interest income for the taxable year and 30 percent of the adjusted
taxable income reported during the tax year. This limitation is not merely
applied at the ultimate taxpayer level, but is also applied at the partnership level.
That could lead to interest deductions that would otherwise be deductible at the
corporate level that are limited at the partnership level.303
Considerable analysis will be needed to evaluate how this limitation applies

to a NMTC transaction. At the investment-fund level, it will first depend upon
whether the entity is treated as a partnership or a disregarded entity. While
a disregarded entity wouldn’t be subject to the limitation itself, its owner,
likely a corporation, would need to evaluate whether it can deduct the interest.
This evaluation would be done at the corporate level and include all of the
corporation’s activity rather than just that of the investment fund entity.
There is a small-business exception to the interest expense limitation rules, but

most NMTC investment funds taxed as partnerships will not qualify for the
exception, as partnerships that allocate more than 35 percent of their losses
to limited partners or nonmanager limited liability company members are
generally not eligible.304

448(d)(3), 461(i)(3)(B) and 1256(e)(3)(B).

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If the investment fund is a partnership, the investment fund must first

determine if the interest expense should be treated as business interest expense
or investment interest expense. The limitation on interest deductions does not
apply to investment interest expense. 305 As such, if the interest on a leverage
loan is properly classified as investment expense, then the interest expense
limitation would not apply.
If interest on the leverage loan is classified as business interest expense and the
deductions are limited, the partner’s basis in the partnership is still reduced by
the amount of interest expense that is nondeductible. Upon disposition of the
partnership interest, the partner’s basis is increased by the amount of interest
expense carried forward that hasn’t been deducted. This increase in partnership
basis would offset the gain on sale that traditionally arises due to the NMTC
basis reduction. A lack of a deduction for interest expense on the leverage loan
would mean investors will see their taxable income increase in the early years,
only to be offset by a smaller gain upon exit (or a larger loss), which would
reduce the yield to any NMTC investor who invests in an investment fund that is
subject to the limit on interest deductions.
It’s unclear if allocations of income to a partnership that include interest

income as a component–such as income from a CDE consisting primarily of
interest income from qualified low-income community investments (QLICIs)–
would allow the investment fund to look through to the activity of the CDE to
identify the portion of the pass-through income consisting of interest income
in calculating the limitation on interest deductions. The IRS will need to issue
guidance regarding tiered partnerships and the deductibility of interest expense,
at a minimum, to deal with anti-abuse concerns.
QALICBs will also need to consider the affect the interest deduction limitation
has on their entity. Traditionally, most NMTC transactions are structured with
the investment in the CDE as loans from CDEs. If the QALICB doesn’t meet one
of the available exceptions to the interest deduction limitation rules, it’s possible
that CDEs may begin to offer other types of investments such as preferred equity
to accommodate this change in tax law. Such a structure would eliminate the

need for the QALICB to make critical decisions about whether or not to elect out
of the limitation (assuming the QALICB is a real estate trade or business).306

taxable years beginning after Dec. 31, 2017.307
4. Elimination of Partnership Technical Terminations
Before the new law, transfers of more than 50 percent or more of interests
in the profits and capital of a partnership cause the deemed termination of
the partnership and the formation of a new partnership.308 This process was
known as a technical termination. P.L. 115-97 repealed this provision, which
may actually simplify concerns investors had regarding QALICB compliance
when a technical termination occurs (see section II.C.1.d. Changes to Technical
Terminations of Partnerships for additional discussion regarding the elimination
of partnership technical terminations). Before this change, investors and CDEs
were concerned that a technical termination would require much of the same
underwriting and scrutiny of QALICB status as was prepared when the QLICIs
were initially made such as a new tax opinion and financial forecast. Some
loan documents even had requirements that the QALICB get approval from
the CDE if a change in ownership was going to trigger a technical termination.
Now that technical terminations have been repealed, it’s likely that these
concerns will be eliminated or the perceived risk associated with a change has
significantly decreased.
The repeal of the technical termination rules is effective for tax years beginning
after Dec. 31, 2017.309

307 Section 13301(c) of P.L. 115-97.
308 IRC Section 708(b)(1)(B), as existed prior to its elimination by Section 13504 of P.L. 115-97.
309 Section 13504(c) of P.L. 115-97.

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VI Renewable Energy Tax Credits
VI. Renewable Energy Tax Credits

While the final bill retained the renewable energy ITC and PTC without any
changes to current law, there were several provisions of P.L. 115-97 that may
indirectly affect RETCs.310
A. Statutory Changes to Renewable

Energy Tax Credit Provisions
Leading up to the passage of P.L. 115-97, the tax reform legislative process
included several proposed changes that would have materially affected the
RETC in adverse ways, some of which would have resulted in significant
reductions to the availability of RETCs and the associated generation of clean,
renewable energy. However, in the final legislation, there were no direct changes
to the RETCs. Instead, several provisions affecting taxpayers more generally
are likely to have an indirect impact on RETCs. For example, the final version
of P.L. 115-97 left both the 30 percent ITC and PTC relatively unchanged from
a statutory standpoint. The ITC phaseout schedule agreed to originally in
December 2015 extension was left in place. The PTC amount was unchanged at
the current 2.3 cent per kWh and the beginning-of-construction requirements as
defined in several IRS notices311 were retained. Although the RETC industry was
damaged by the passage of P.L. 115-97, it was able to breathe a sigh of relief from
the lack of direct impacts from tax reform.
B. Effects to Renewable Energy Tax Credits

from other Amendments in P.L. 115-97
As with the other tax credits discussed in this guide, many of the general
business, corporate and noncoporate changes implemented by P.L. 115-97 are
expected to directly or indirectly affect the RETC industry.
310 For analysis of tax reforms’ effect on the RETC see 2017 Tax Reform Legislation and Renewable Energy Tax
Equity, Forrest Milder, Nixon Peabody, March 2018 Novogradac Journal of Tax Credits.
311 IRS Notice 2013-29, Notice 2013-60, Notice 2015-25 and Notice 2016-31.

Renewable Energy Tax Credits VI
1. Orphaned Technologies
Although P.L. 115-97 left out an extension of both the ITC and PTC, renewable
energy technologies that have become known as the orphaned renewable energy
technologies were recently extended along the same timeline as the 30 percent
ITC phasedown as part of the Bipartisan Budget Act of 2018.
The orphaned renewable energy technologies include fuel cells, small wind,
combined heat and power (CHP), geothermal and microturbines. The ITC for
these technologies expired Dec. 31, 2016, and were subsequently extended under
the Bipartisan Budget Act of 2018 to Dec. 31, 2023. This extension of the ITC
for these technologies is seen as a key variable in the financial viability of RETC
projects involving these technologies.
PTC orphaned renewable energy technologies including biomass, trash and

hydroelectric facilities for which the PTC expired as of Dec. 31, 2015, were
extended only through Dec. 31, 2017, under the Bipartisan Budget Act of
2018. Because the Bipartisan Budget Act of 2018 was passed in February 2018
and the extension for these technologies expired effective Dec. 31, 2017, the
extension is expected to have a minimal impact as developers did not have a
chance to anticipate the extension and construct projects to take advantage of
the extension of the PTC to these technologies. Absent additional legislation
to provide further extension for these PTC technologies, this means that these
technologies may still be considered orphaned on a go-forward basis.
2. Effect of Lower Corporate Tax Rate
The reduction in the corporate tax rate, as enacted by P.L. 115-97312 (see section
II.B.1 Corporate Tax Rate for additional discussion regarding the reduction to
corporate tax rates), has a substantial impact on the RETC industry in several
key areas. First, the lower corporate tax rate causes an overall decrease in the
investor marketplace’s tax liability. Because investors owe less tax, they are
312 IRC Section 11(b), as amended by section 13001 of P.L. 115-97.

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likely to naturally decrease their demand for RETC investments. This reduced
demand could ultimately lead to downward pressure on ITC and PTC pricing.
In addition to the potential changes to demand for tax credits, a lower corporate
tax rate has a dramatic negative effect on the value of RETC investments. RETC
investors traditionally have enjoyed two primary tax benefits associated with
their investments: claiming the tax credit, as well as claiming depreciation
deductions. Those deductions are inherently more valuable when tax rates
are higher and less valuable when tax rates are lower. Based on these factors,
each investor’s appetite for RETCs will vary and as such, pricing for RETCs
may fluctuate as the market seeks equilibrium. To the extent that RETC equity
pricing declines, developers and sponsors will need to replace any lost RETC
equity with either sponsor equity or additional debt to finance their projects.
The corporate tax rate reduction also brings potential benefit to RETC
transactions. With lower tax rates, an investor’s tax liability stemming from
income allocated to the investor decreases. Historically, some tax credit
investors in partnership transactions have required the partnership to make
special tax distributions of cash to the investor to pay taxes in connection with
income allocated to the investor. A reduction in the corporate tax rate may lower
these special tax distributions for existing RETC investments. Based on the
lower corporate tax rate, there is some speculation that special tax distributions
may not be as prevalent in the future.
Another benefit from the lower tax rate is the reduced tax burden that investors
may incur from gains recognized upon disposition of their investment. This
reduced exit tax most likely will have a positive impact for any future deal
pricing. Additionally, this could result in an unexpected windfall to investors in
older RETC investments that are now approaching an exit. In those situations,
the depreciation benefit generated during the first few years of the investment
was more valuable because higher tax rates prevailed at the time, whereas the
reduced corporate tax rate will now apply to any exit tax.
The decrease in the corporate tax rate may also provide a positive impact on
future appraisals of energy facilities. The after-tax cash flows will increase
because of the reduction in corporate tax rates, which could result in higher

appraised values. In certain structures, such as partnership-flip structures,

the system is sold into the fund at fair market value. For these structures, the
increased fair market value could enhance the amount of credits generated,
increase the asset basis for which depreciation is calculated and ultimately
increase the amount of RETC equity. Depending on the specific valuation, this
structure may yield superior benefits compared to a cost-plus-development fee
arrangement, which could incentivize the RETC industry to favor structuring
transactions which use fair market value step ups.
3. Bonus Depreciation
Bonus deprecation of 100 percent is available to property acquired and placed in

service from Sept. 27, 2017, through Dec. 31, 2022 (the expansion of the bonus
depreciation provisions are outlined in section II. A. 1 Cost Recovery Changes).
After 2022, there is an annual 20 percent stepdown in bonus deprecation (80
percent for 2023, 60 percent for 2024, etc.) with bonus depreciation ending
after 2026.313 The “old” bonus depreciation rules are still applicable for property
acquired before Sept. 28, 2017, that allows for bonus depreciation of 50 percent
for 2017, 40 percent for 2018 and 30 percent for 2019.314
Because broad swaths of RETC property qualify for bonus depreciation, the
ability of assets to qualify can at times be monumental. Since assets acquired
and placed in service after Sept. 27, 2017, generally qualify for 100 percent
bonus depreciation, many taxpayers may assume that their otherwise-eligible
assets will qualify for 100 percent bonus depreciation simply by virtue of being
placed in service after this date. However, the acquisition rules include a written
binding contract provision, which could result in the acquisition date being
much earlier than the date the assets are placed in service. More specifically,
in evaluating eligibility for 100 percent bonus depreciation, assets acquired
pursuant to a written binding contract are deemed to be acquired on the date
of the contract.315 Therefore, for assets placed in service in late 2017 and even
into 2018, some projects may not meet the requirements for 100 percent bonus
313 IRC Section 168(k)(6), as amended by Section 13201(a) of P.L. 115-97.

314 IRC Section 168(k)(8), as amended by Section 13201(a) of P.L. 115-97.
315 Section 13201(h)(1)(B) of P.L. 115-97.

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depreciation. Careful consideration must be made to evaluate whether a written

binding contract exists and to which assets it applies, as extensive regulations
govern the precise timing for when acquisition is deemed to occur under a
written binding contract when evaluating eligibility for bonus depreciation.316
For taxpayers desiring to either avoid or reduce their bonus depreciation,

elections are available. First, an election is still available to elect out of bonus
depreciation entirely.317 This election is made separately for each class of
depreciable assets.318 Additionally, a new election is available to apply 50
percent instead of 100 percent. However, the election to use 50 percent in lieu
of 100 percent is only available for a very narrow window of time: for property
placed in service during the first taxable year ending after Sept. 27, 2017.319 For
calendar-year taxpayers, only property acquired between Sept. 27, 2017, and
Dec. 31, 2017, would qualify for this election to use 50 percent. Therefore, aside
from that one exception, there is no option for taxpayers to choose between 100
percent bonus depreciation and the “old” bonus depreciation, which allowed for
50 percent bonus in 2017. Accordingly, aside from that exception, if property
qualifies for 100 percent bonus depreciation, the taxpayer’s only two options
are 100 percent bonus depreciation or standard MACRS depreciation with
no bonus depreciation.
While 100 percent bonus depreciation appears to provide a large tax incentive
to renewable energy projects, there are definite traps for the unwary and
uninitiated, particularly as it relates to the potential for reallocations associated
with the substantial economic effect provisions governing partnership
allocations of income and losses in the context of partnership flip transactions.
To that end, investors and sponsors should carefully analyze their capital
accounts and tax basis for the year the property is placed in service to ensure
depreciation is allocated in the manner intended by both parties. Complicating
matters, investors often contribute a substantial amount of their capital
316 See Treasury Regulation Section 1.168(k)-1(b)(4), which includes extensive rules around acquisition of property
eligible for bonus depreciation. Although this regulation was specifically written to apply to bonus depreciation
provisions effective in 2003 and 2005, similar principles will undoubtedly apply to bonus depreciation outlined
in P.L. 115-97 due to statutory language specifically referring to the acquisition date being affected by written
binding contracts in Section 13201(h)(1)(B) of P.L. 115-97.
317 IRC Section 168(k)(7).
319 IRC Section 168(k)(10)(A), as amended by Section 13201(d) of P.L. 115-97.

after the placed-in-service date, which in some cases could even fall to the
tax year following the placed-in-service date. This fact pattern could result
in some unintended consequences, whereby depreciation may be allocated
to the sponsor. In addition to the negative consequences that arise from an
unanticipated loss reallocation away from the investor, many RETC industry
practitioners have significant concerns regarding whether ITCs can be properly
allocated to the investor in the same year that losses are reallocated to another
partner, with 100 percent bonus being a primary mathematical driver of
those reallocations. Because of these complicating factors, many taxpayers or
investors claiming ITCs may elect out of 100 percent bonus depreciation.
4. Interest Deduction Limitation
regarding this limitation).320 Due to the large role typically played by debt in
financing RETC transactions, changes to interest deductibility can have an
impact on the pricing offered by tax credit investors.
This provision limits the deduction of business interest expense to 30 percent

of a business’s adjusted taxable income.321 Adjusted taxable income is generally
calculated by RETC entities by starting with taxable income and adding
back (1) any business interest expense and (2) depreciation and amortization
deductions.322 For tax years beginning on Jan. 1, 2022, and later, depreciation
and amortization deductions are not added back to adjusted taxable income.323
Because the interest limitation is applied at the partnership level, transactions

with either project-level or back leveraged debt are affected. Any interest
deduction allowed after computing the limitation is included in each partners’
respective income or loss from the partnership. The interest that is not deducted
is allocated to each partner in the same ratio as other items of net income or

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loss324 and can be carried forward indefinitely.325 Each respective partner will
now need to track this excess business interest carry-forward as the amount
that may be deducted in future tax years when the partnership allocates excess
taxable income to the partner. Excess taxable income is generally income from
the partnership in which business interest expense did not exceed adjusted
taxable income in the current tax year.326 Excess business interest allocated to
each partner also reduces the partner’s basis in its partnership interest.327 This
basis is restored in the event the partner disposes of its partnership interest,
effectively increasing or decreasing the amount of gain or loss on disposition.328
In the event a corporate developer used back-leverage debt, the corporate

developer may be able to use its distributable share of business taxable income
from the partnership in the computation of its business interest limitation at the
corporate level but will still be limited to the same 30 percent threshold.
There are two primary exceptions to the interest-deduction limitation that could
apply to a RETC transaction. There is a small-business exception to the interest-
expense limitation rules,329 but most RETC partnerships will not qualify for the
exception, as partnerships that allocate more than 35 percent of their losses to
limited partners are generally not eligible, such as where a limited partner or
non-managing member is allocated 35 percent or more of the taxable losses,
which is likely to include many RETC partnerships.330 This would disqualify
certain structures from qualifying for the exception, such as partnership flip
transactions and certain lease pass-through transactions in which the lessor
allocates more than 35 percent of its losses to limited partners (and LLC
nonmanaging members) before a flip in partnership profit and loss allocations.
This would include a structure where the lessee has an ownership interest in
the lessor and receives an allocation of more than 35 percent of losses in any
given tax year, either based solely on the lessee’s ownership in the lessor or when
combined with other limited partners in the lessor. The second exception is for

325 IRC Section 163(j)(4)(B)(ii), as amended by Section 13301(a) of P.L. 115-97.
326 IRC Section 163(j)(4)(C), as amended by Section 13301(a) of P.L. 115-97.
448(d)(3), 461(i)(3)(B) and 1256(e)(3)(B).

interest incurred by taxpayers in the business of selling electrical energy–as long

as the selling price is established or approved by a state or political subdivision,
or any agency or instrumentality of the United States, or by a public service or
public utility commission or other similar government body, or the governing
or ratemaking body of an electric cooperative.331 This exception could apply to
RETC transactions that derive their revenues from a power purchase agreement
(PPA) that is subject to approvals of one of the said agencies. This second
exception is clearly meant to apply to public utilities, but the current definition
could have a broader impact, though many RETC industry practitioners suspect
that additional guidance will eventually be issued to close this potential loophole
and eliminate the application of this provision to nonpublic utility taxpayers
owning RETC assets.
With the passage of P.L. 115-97 in late 2017, the corporate AMT was repealed,
but the BEAT was instituted (see section II.B.3 Base Erosion and Anti-Abuse
Tax for additional discussion regarding the BEAT). Similar to the AMT, the
BEAT is a parallel system of taxation. For years beginning after Dec. 31, 2017,
large corporations with international operations must calculate their tax using
two different calculations: first, using the regular corporate income tax; second,
using the BEAT. Corporate taxpayers then essentially pay the higher of the two
calculations.
Of paramount importance to the RETC is the ability of RETCs to offset the

BEAT. Depending on the precise facts and circumstances attributable to any
given corporate taxpayer, RETCs may not fully offset the BEAT dollar for
dollar. Moreover, the ability of tax credits to offset the BEAT changes over
time. More specifically, between 2018 and 2025, only 80 percent of RETCs are
used in determining a corporation’s BEAT liability, which means a corporation
will generally receive a benefit from the RETC of between 80 percent and 100
percent of the RETCs. 332 Additionally, to the extent that credits are available but
do not offset the BEAT, there are no provisions for those credits to be carried
331 IRC Section 163(j)(7)(A)(iv), as amended by Section 13301(a) of P.L. 115-97.

332 IRC Section 59A(b)(1)(B)(ii)(II).

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forward. Mathematically speaking, for taxpayers who owe tax under the BEAT
between 2018 and 2025, this could result in as much as 20 percent of their
RETCs being lost. Beginning in 2026, RETCs have zero ability to offset the
BEAT. 333 Therefore, beginning in 2026, for taxpayers who owe tax under the
BEAT, as much as 100 percent of their RETCs could be lost.
Because of this dynamic, investors should carefully size their tax credit
investments to carefully manage their regular tax liability, lest their regular
tax liability is reduced below their BEAT, resulting in lost credits. The BEAT
provisions will affect a broad swath of tax credit investors, including foreign-
owned banks and many U.S. banks that have a significant foreign presence. This
could result in reduced demand for tax credit investments in the future, as well
as an influx of secondary market transactions, as existing investors may seek to
reduce their tax credit holdings to manage the interplay between their regular
income tax liability and their liability under the BEAT.
Renewable energy developers are concerned the BEAT could have a detrimental
effect on the tax equity market. Tax equity investors subject to the BEAT who
are unsure whether the full benefit of the credits will be achieved are likely to
sharply curtail or cease making tax equity investments altogether. Although
the precise size of the effect of the BEAT on the RETC market is unknown, the
RETC market is expected to continue to function and most industry advisors
suspect that the amount of RETC equity invested in 2018 will be adversely
affected by the BEAT.
Wind PTC transactions are likely to be the most negatively impacted by the
BEAT. Because the PTC has a 10-year credit period (like the LIHTC), investors
in existing PTC transactions are at risk that the BEAT could render up to
20 percent of the credits remaining through 2025 worthless and all credits
expected after 2025 worthless. For prospective transactions, because of the
potential loss of upward of 20 percent of RETCs due to the BEAT, RETC
investors will likely place a discount on, or value only 80 percent of PTCs from
2018 through 2025. PTCs after 2025 could be severely discounted, as they have
zero ability to offset the BEAT after 2025. In many cases, unless a tax equity
333 IRC Section 59A(b)(2)(B).

investor is confident that they have no BEAT exposure, wind developers will
likely elect to claim the ITC in lieu of the PTC on new transactions or source tax
equity financing from an investor not subject to the BEAT.
Due to the inability of RETCs to offset the BEAT after 2025, the ITC equity
market for credits generated after 2025 is very difficult to predict. Fortunately,
ITC equity investors will have the flexibility to size their investments based on
their current-year BEAT exposure, rather than having to predict their BEAT
exposure for many years in the future. In spite of those beneficial aspects,
current ITC tax equity investors’ exposure to the BEAT could affect pricing as
early as beginning in 2018. Any reduction in pricing will present challenges to
developers to fill financing gaps triggered by the reduction in pricing.
6. Repeal of Corporate AMT
The final version of P.L. 115-97 repealed the corporate AMT through a last-
minute change.334 Before the enactment of P.L. 115-97, tax equity investors who
were subject to AMT could offset such tax liability by applying the ITC and the
first four years of PTCs against their AMT liability. By repealing the corporate
AMT, both the ITC and PTC are now on the same footing.
7. Repeal of Partnership Technical Terminations
Between partnership flips and put/call options, technical terminations among

RETC transactions were often considered inevitable. Before the passing of
P.L. 115-97, a technical termination occurred when transfers of 50 percent or
more of interests in the profits and capital of a partnership occurred, resulting
in the deemed termination of the partnership and the formation of a new
partnership.335 The application of prior law technical terminations rules was at
times unclear, as they did not provide a clear definition of profits and capital.
When in doubt, this lack of clear guidance led many in the RETC industry to
conservatively conclude technical terminations occurred. With the repeal of
334 Section 12001(a) of P.L. 115-97.

335 Section 708(b)(1)(B), as existed prior to the revisions made by Section 13504 of P.L. 115-97.

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the technical termination provision,336 the concerns investors had regarding

depreciation restarts and the corresponding impacts on yields have all
but been eliminated .
Before this change, depreciation of the project’s assets would restart when a sale
of 50 percent or more of the profits or capital interests in a partnership caused
a technical termination. A consequence of the technical termination was less
depreciation expense in the year of the sale than would have been deducted
absent the sale.337 Given that the timing of many partnership flip transaction are
contingent on the tax equity investor meeting a predefined target internal rate
of return, this delay in depreciation has in the past resulted in flips occurring
significantly later than originally projected.
8. Statutory Changes to Net Operating Losses–

Repeal of Net Operating Loss Carryback
Before P.L. 115-97, corporate taxpayers were able to claim a deduction for
NOLs and either carry the deduction back to each of the two taxable years
preceding the taxable year of the loss or carry the deduction forward to
each of the successive 20 taxable years. P.L. 115-97 eliminated the two-year
carryback provision, except for farming losses and NOLs generated by insurance
companies.338 Repeal of the carryback option is a negative result for the
attractiveness of renewable energy projects to investors, who previously could
have used tax losses generated by such investments (which typically consist
primarily of five-year MACRS property) to manage unexpected fluctuations in
corporate income. This has a negative impact on the ITC more so than the PTC
as investors with previous years of taxable income could more easily apply the
ITC to these previous years of taxable income than the PTC. The amendment is
effective for losses generated by taxable years beginning after Dec. 31, 2017.
336 Section 13504 of P.L. 115-97.

337 IRC Section 168(i)(7), as existed immediately prior to the passage of P.L. 115-97 and the preamble to the
Proposed Regulations that were finalized by TD 8717.
338 Section 13302 of the P.L. 115-97 modified Section 172 to reflect the revised carryback provisions.

9. P.L. 115-97 Statutory Changes to Recognition of Prepayments
P.L. 115-97 amended several provisions related to income recognition that

will affect taxpayers in all industries. Before the law, accrual basis taxpayers
recognized income for federal income tax purposes when all conditions had
been met to establish the right of the taxpayer to receive the income and the
amount of income was readily determinable, i.e. the “all-events test,” 339 except
for certain exclusions of deferrals. P.L. 115-97 amended the general rule for
inclusion of income to provide that an accrual basis taxpayer must recognize
income no later than when the revenue is taken into account in an applicable
financial statement of the taxpayer or such other statement as the IRS may
specify for such purposes.340 This change is not likely to have a significant impact
on renewable energy transactions as income has historically been recognized
earlier for federal income tax purposes than generally accepted accounting
principles.
More relevant to renewable energy transaction participants is the amendment

to the rules for taxable income recognition for “advance payments.” Previously,
taxpayers were not required to recognize taxable income from certain advance
payments immediately if the payments were for certain goods and services (of
which electricity was generally considered includable under the definition of
an inventoriable good) that were delivered over a period of time.341 Under P.L.
115-97, for taxable years beginning after Dec. 31, 2017, the advance-payment
rule was amended such that taxable income is required to be recognized no later
than the end of the tax year following the year of receipt. Even then, the deferral
to the next year for tax purposes is only available if the income is also deferred
for financial statement purposes and if elected by the taxpayer.342 The complete
list of items that qualify as advance payments subject to the one-year deferral
provision is not yet known as the IRS has not yet released a list of goods and
services as promulgated by the amendment;343 however, if electricity is included,
the effect on prepaid PPAs will be dramatic, as they become significantly
339 IRC Section 451 and the Treasury Regulations thereunder, prior to amendment by the P.L. 115-97.
340 Section 13221 of the P.L. 115-97
341 Treas. Reg. 1.451-5
343 IRC Section 451(c)(4)(A)(iii), as amended by Section 13221(b) of P.L. 115-97 requires the Treasury Secretary to
identify a list of goods, services and other items subject to the advance payments rule.

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less attractive due to the taxable income required to be recognized, at the

latest, within two years of the payment. The ability to use 100 percent bonus
depreciation may somewhat mitigate the negative impact of the prepaid income
recognition. Advance payments specifically do not include rent, so the use of IRC
Section 467 prepaid leases is not likely to be affected.344
10. Impact of Pass-through Deduction for Individuals
P.L. 115-97 adds a new provision to allow noncorporate taxpayers to claim a

deduction that effectively reduces the tax rate that applies to certain types of
“qualified business income” by up to 20 percent (See section II.C.1.a. Special
Deductions for Qualified Business Income for a full discussion on the subject).345
This deduction as it applies to individuals is not expected to have a large impact
on the RETC industry as a whole. Generally, the participation of individuals as
tax equity investors has been the exception rather than the norm due to various
hurdles preventing individuals from efficiently monetizing ITC and tax benefits
such as IRC Section 469 active/passive income considerations and IRC Section
465 at-risk limitations.
Despite the hurdles, there is a growing niche industry where high-net-worth

individuals are actively investing in RETC transactions, specifically in the solar
industry. Additionally, to the extent that the uncertainty from the BEAT and the
lower corporate tax rate deter traditional corporate tax equity investors, there
may be an opportunity for individuals to play an increased role in the tax equity
market in a post-tax-reform environment. While some individuals chose to own
solar energy systems outright for cash flows and simplicity’s sake, the pass-
through deduction may make it increasingly attractive for individuals to invest
in solar via a partnership or pass-through structure to take advantage of the 20
percent deduction if such individuals can successfully navigate the limitations
imposed by active/passive income considerations.
344 IRC Section 451(c)(4)(B), as amended by section 13221(b) of P.L. 115-97.

345 IRC Section 199A(a), as instituted by Section 11011(a) of P.L. 115-97.

11. RETC Investor GAAP Impacts
Tax reform has far-ranging impacts that carry into financial reporting
considerations and implications on both pre-existing transactions and
transactions structured post-tax reform. RETC investors have used both the
ITC and PTC for a number of years and typically carry these investments on
their balance sheets using the equity method in connection with partnership
flip transactions. In the context of the changes to tax law under P.L. 115-97,
this situation presents risks and implications to investors as it relates to their
financial reporting outcomes.
a) Deferred Tax Assets and Liabilities
Accelerated tax depreciation typical for RETC assets causes large book tax
differences that give rise to deferred tax liabilities. One-hundred percent asset
expensing is expected to further magnify these differences and may cause larger
deferred tax liabilities in the initial years of RETC transactions. In the context
of partnership-flip transactions, these large book tax differences caused by
100 percent asset expensing may be offset to a certain extent by corresponding
hypothetical liquidation at book value (HLBV) adjustments as discussed below
and/or various other GAAP accounting policy elections.
b) Impairment Considerations
Impairment as it applies to RETC assets may take multiple forms. Impairment

may apply at either the asset level or for investors in partnerships owning RETC
assets, it may apply at the investor level, as the investor considers whether their
investment in the RETC partnership has been impaired due to a reduction in the
after-tax benefits expected from its investment.
RETC asset values tend to rise when tax rates fall, thereby limiting the potential
for impairment due to the change in corporate tax rates under P.L. 115-97. The
increase in RETC asset values is driven by expected increases in after tax cash
flow associated with reduced tax rates.

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For investments in RETC partnerships, investors will need to consider the

possibility that their investment has been impaired. The transaction structure
and where it is in its life cycle may dictate if an RETC investor needs to record
an equity method investment impairment charge to earnings. For example,
assume a partnership flip structure with the RETC asset placed in service in
2017. The tax equity investor initially priced the transaction by calculating the
benefit of tax losses using a 35 percent tax rate. Based on the changes to tax
rates from P.L. 115-97, those same tax losses are now valued at a 21 percent tax
rate and are worth inherently less. As a result, an indicator of impairment is
present and the investor should perform an undiscounted after-tax cash-flow
analysis to determine if their equity investment is impaired. Most transactions
will likely not be impaired as there are compensating mechanisms often in place
such as target yield mechanisms, equity contribution adjusters, indemnities and
other features inherent in tax equity transactions designed to protect investors
from economic downside scenarios caused by a reduction in tax rates.
c) Hypothetical Liquidation at Book Value Calculations
Tax equity transactions will need to be evaluated on a case-by-case basis to

properly assess the impacts of tax reform on HLBV calculations. Liquidation
provisions structured in partnership flip transactions can vary widely from
deal to deal. However, there are two main areas where the changes to tax law
implemented by P.L. 115-97 are expected to potentially affect HLBV calculations.
The first effect is triggered by the impact of 100 percent asset expensing on
the RETC investor’s capital account, which not only increases the amount of
liquidation gain to be allocated to the RETC investor, but also disproportionately
impacts the RETC investor’s tax capital account. In some cases, the RETC
investor’s capital account is reduced to zero (or a negative balance if certain
exceptions are met). This has the potential to dramatically affect the liquidation
allocations to the RETC investor, as the RETC investor’s negative capital
account is used as a starting point in calculating liquidating distributions
allocable to the RETC investor and reduced capital accounts result in
reduced liquidating distributions.

The second effect is based on target yield calculations. For partnerships that
include target yield calculations, the RETC investor’s benefits–including
liquidating distributions–are sized to deliver a minimum targeted yield.
Those calculations typically incorporate a gross-up mechanism that allocates
additional liquidation gain and liquidating cash proceeds to the RETC investor
to compensate for the taxes the RETC investor will pay at exit. These additional
liquidating cash proceeds allow the RETC investor to achieve their targeted
yield. Based on the new lower corporate rates implemented by P.L. 115-97,
the gross up is calculated at the new lower corporate tax rate and accordingly
the liquidation gain and liquidating cash proceeds allocated to investors
has been reduced.

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VII Opportunity Zones
VII. Opportunity Zones

P.L. 115-97 created a new tool for community development–opportunity zones–
designed to provide tax incentives to help unlock investor capital to fund
businesses and real property in underserved communities.
A. Overview
The opportunity zones provision of P.L. 115-97 provides for an additional
incentive to encourage investment in economically distressed communities by
allowing individual and corporate taxpayers a temporary deferral of income
(but no later than Dec. 31, 2026) for an unlimited amount of gains reinvested
in a qualified opportunity fund.346 Additional incentives are also provided for
investments held at least five, seven and 10 or more years to encourage long-
term investments in qualified opportunity zones.347
Certain low-income community population census tracts are eligible to be

designated as qualified opportunity zones. The definition for “low-income
community” is the same as that employed under the NMTC as the basis for
defining a qualified opportunity zone.348 However, only 25 percent of the low-
income communities within any state are eligible for the designation and
governors are responsible for nominating opportunity zones in their states to be
designated as qualified opportunity zones.349
In addition to the deferral of gain until no later than Dec. 31, 2026, the tool
incentivizes long-term investment by allowing for a modest step-up in basis for
investments that are held beyond five and seven years.350 For investments held
at least five years, the taxpayer’s basis is increased by 10 percent of the original
gain.351 For investments held for at least seven years, the taxpayer’s basis is
increased by 5 percent of the original gain.352
346 IRC Section 1400Z-2(a)(1)(A) as instituted by Section 13823(a) of P.L. 115-97.
347 IRC Section 1400Z-2(b)(2) as instituted by Section 13823(a) of P.L. 115-97.
348 IRC Section 1400Z-1(c)(1) as instituted by Section 13823(a) of P.L. 115-97 and, by reference, IRC Section 45D(e).
349 IRC Section 1400Z-1(d)(1) as instituted by Section 13823(a) of P.L. 115-97.
350 IRC Section 1400Z-2(b)(2)(B) as instituted by Section 13823(a) of P.L. 115-97.
351 IRC Section 1400Z-2(b)(2)(B)(iii) as instituted by Section 13823(a) of P.L. 115-97.
352 IRC Section 1400Z-2(b)(2)(B)(iv) as instituted by Section 13823(a) of P.L. 115-97.

Opportunity Zones VII
Furthermore, as an additional incentive to make long-term, patient capital

investments, taxpayers holding opportunity fund investments for a period of
at least 10 years are exempt from any additional gains beyond that which was
previously deferred.353
The opportunity zones incentive is a complementary tool to the NMTC. While

both incentives help bring needed private capital to low-income communities,
they differ in important ways and don’t represent duplicative forms of
investment. The opportunity zones incentive offers a shallower subsidy per
investment but the total amount of investments qualifying for the subsidy
are not limited by annual allocation amounts. As such, the opportunity zone
incentive has the potential to incentivize the deployment of substantially more
capital than the NMTC.
In addition, each state is given equal authority to designate a similar number

of qualified opportunity zones, ensuring that each state can incentivize private
capital to areas so designated.354 While NMTC can still bring investment to low-
income areas outside of opportunity zones, many low-income communities may
not receive any private capital through the NMTC due to the scarcity of NMTC
annual allocations.
B. Designation of Qualified Opportunity Zones

A qualified opportunity zone is a population census tract that is a low-income
community.355 The “low-income community” definition is the same as used
for the NMTC–any census tract that has poverty rate of at least 20 percent or
that has a median income that does not exceed the highest of 80 percent of the
median income of the metropolitan area or of the statewide median income.356
Qualified opportunity zones may be designated in each state, territory and
possession of the United States.357 Governors nominate tracts for designation
and Treasury certifies such nomination and designates such tracts as qualified
353 IRC Section 1400Z-2(c) as instituted by Section 13823(a) of P.L. 115-97.

354 IRC Section 1400Z-1(d) as instituted by Section 13823(a) of P.L. 115-97.
355 IRC Section 1400Z-1(a) as instituted by Section 13823(a) of P.L. 115-97.
356 IRC Section 1400Z-1(c)(1) as instituted by Section 13823(a) of P.L. 115-97.
357 IRC Section 1400Z-1(c)(3) as instituted by Section 13823(a) of P.L. 115-97.

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opportunity zones.358 Governors were required to nominate tracts and notify

Treasury within a 90-day period beginning on the date of enactment of P.L. 115-
97 which ended March 21, 2018.359 The Secretary of the Treasury had 30 days
to certify such nomination and designate such tract as a qualified opportunity
zone.360 Governors could request a 30 day-extension for the determination
period or the consideration period, or both.361 The statute does not specify
what happens if a governor fails to nominate opportunity zones by the deadline
and therefore it is possible that the opportunity for a state may be lost, thus
depriving the state of the incentive’s benefits.362
The number of population census tracts in a state that may be designated as a

qualified opportunity zone may not exceed 25 percent of the number of low-
income communities in the state unless the number of low-income communities
in the state is less than 100, in which case 25 tracts may be designated.363 In
cases where 25 percent of the number of low-income communities in the state
does not yield a whole number, the state may round up. For example, if there
are 101 low-income communities in a state, 25 percent of that number would be
25.25, which would be rounded up to 26 for this purpose.364
Any population census tract that is not a low-income community may be

designated as a qualified opportunity zone if it is contiguous to a low-income
community that is designated as an opportunity zone and the median family
income of the tract does not exceed 125 percent of the median family income
of the low-income community with which the tract is contiguous.365 Not more
than 5 percent of a state’s total designated tracts can be designated under
this contiguous exception.366 In situations where 5 percent of a state’s actual
designated tracts does not yield a whole number, the state may round up. For
358 IRC Section 1400Z-1(b)(1) as instituted by Section 13823(a) of P.L. 115-97. The statute uses the term “chief
executive officer of each state” instead of governor to include the District of Columbia which does not have a
governor.
359 IRC Section 1400Z-1(c)(2)(B) as instituted by Section 13823(a) of P.L. 115-97.
360 IRC Section 1400Z-1(c)(2)(A) as instituted by Section 13823(a) of P.L. 115-97.
362 The forerunner to the opportunity zones provision was the Investing in Opportunity Act, H.R. 828 115th
Congress (2017). H.R. 828 allowed the Secretary to designate opportunity zones if a governor failed to timely do
so, but that provision was not included in 1400Z-1.
363 IRC Section 1400Z-1(d) as instituted by Section 13823(a) of P.L. 115-97.
364 Revenue Procedure 2018-16.
365 IRC Section 1400Z-1(e)(1) as instituted by Section 13823(a) of P.L. 115-97.

example, if there are 41 census tracts designated as opportunity zones in a state,

5 percent of that number would be 2.05, which would be rounded up to three
for this purpose. 367
P.L. 115-97 was amended by the Bipartisan Budget Act of 2018 to allow each
census tract that is a low-income community in Puerto Rico to be designated as
an opportunity zone.368 This expansion means that the majority of the island is
automatically designated as opportunity zones.
Once an opportunity zone is designated, it remains a qualified opportunity zone

for a period of 10 years from the date of designation.369
C. Gains Invested In Opportunity Zones

The following sections detail how gains invested in opportunity zones will be
treated under the new provision.
1. Temporary Gain Deferral
Under the deferral provision, any taxpayer may elect to temporarily defer an
unlimited amount of capital gains realized from the sale or exchange of any
property with an unrelated party370 to the extent that such gains are reinvested
in a qualified opportunity fund within 180 days of the sale or exchange.371 A
taxpayer may elect to defer all or only a portion of the gain from a particular
sale or exchange.372 For example, if a taxpayer sells property with a tax basis of
$300,000 for $1 million, the entire $700,000 of capital gain can be deferred if
timely invested in a qualified opportunity fund. If the taxpayer instead invested
only $500,000 in the qualified opportunity fund, then $200,000 of the gain
367 Revenue Procedure 2018-16.

368 P.L. 115-97 Section 1400Z-1(b) as amended by Section 41115 of the Bipartisan Budget Act of 2018.
369 IRC Section 1400Z-1(f) as instituted by Section 13823(a) of P.L. 115-97.
370 Related party is defined under the statute with reference to IRC Sections 267(b) and 707(b)(1) as modified
by IRC Section 1400Z-2(e)(2) to replace the 50% minimum relationship threshold with a 20% minimum
relationship threshold.
372 IRC Section 1400Z-2(a)(1) as instituted by Section 13823(a) of P.L. 115-97.

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realized would be taxable. If the taxpayer invested the entire $1 million in the
qualified opportunity fund, the investment would be treated as two investments
of $700,000 and $300,000, with only the $700,000 being eligible for any
enticements under the incentive.373
No election may be made with respect to a sale or exchange if an election was

previously made with respect to such sale or exchange, which means that
a taxpayer cannot continue to roll over gains realized from the sale of their
opportunity fund investments.374 Also, no election may be made with respect to
any sale or exchange after Dec. 31, 2026.375
Generally, any gain deferred under this provision is required to be included

in the taxpayer’s income on the earlier of the date on which the investment is
sold or exchanged or Dec. 31, 2026.376 The taxpayer’s basis in their investment
is increased by the amount of deferred gain included in income on Dec. 31,
2026. As such, if the gain is taxed in 2026 and the taxpayer continues to
hold the investment, such gain will not be taxed again when the taxpayer
sells their investment.377
The amount of gain required to be included in a taxpayer’s income is limited

to the lesser of the original amount of gain deferred or the fair market value of
the portion of the taxpayer’s investment subject to the deferral election over the
taxpayer’s basis in the investment.378 For this purpose, the taxpayer’s basis in the
investment is deemed to be zero.379 That means that if a taxpayer’s investment
in an opportunity fund decreases in value during the deferral period, the
amount of gain a taxpayer is required to recognize decreases proportionately.
For example, if a taxpayer invested $700,000 of capital gain in a qualified
opportunity fund and sold the investment after four years for $600,000, only
$600,000 would be taxed.

375 IRC Section 1400Z-2(a)(2)(B) as instituted by Section 13823(a) of P.L. 115-97.
377 IRC Section 1400Z-2(b)(2)(B)(ii) as instituted by Section 13823(a) of P.L. 115-97.
379 IRC Section 1400Z-2(b)(2)(B)(i) as instituted by Section 13823(a) of P.L. 115-97.

2. Long-Term Investment Incentives
To incentivize long-term investments in qualified opportunity zones, a taxpayer

that holds a qualified opportunity fund investment for a period of at least five
years receives an upward basis adjustment of 10 percent of the original gain
deferred. Under this scenario, 10 percent of the deferred gain is permanently
eliminated.380 A taxpayer that holds a qualified opportunity fund investment
for a period of at least seven years receives an additional upward basis
adjustment of 5 percent for a total upward basis adjustment of 15 percent of the
original gain deferred. Under this scenario, 15 percent of the deferred gain is
permanently eliminated.381
For example, if a taxpayer sells property with a tax basis of $300,000 for $1
million and timely invests $700,000 in a qualified opportunity fund for a
period of five years, only $630,000 of the $700,000 of the deferred gain would
be taxable. If instead the taxpayer held the investment for seven years, only
$595,000 of the deferred gain would be taxable.
The statute does not eliminate the benefit of the 10 percent and 15 percent basis
adjustments if the 2026 required recognition date occurs before the end of a
five- or seven-year holding period. Accordingly, the entire deferred gain would
be taxed on Dec. 31, 2026, and presumably a taxpayer’s basis would be further
increased if they continue to hold their investment past the five- and seven-year
marks to benefit a taxpayer on a later sale.
As an added incentive, taxpayers holding qualified opportunity fund

investments for a period of at least 10 years and making a special election in
addition to the election to defer gains are exempt from any additional gain
recognition above that which was previously deferred. This is accomplished by
adjusting the basis of the investment to be equal to the fair market value of the
investment on the date of the sale for opportunity fund investments held for at
least 10 years.382 This long-term incentive does not affect required recognition
of the original gain deferral, which must be recognized Dec. 31, 2026.383 For
380 IRC Section 1400Z-2(b)(2)(B)(iii) as instituted by Section 13823(a) of P.L. 115-97.
381 IRC Section 1400Z-2(b)(2)(B)(iv) as instituted by Section 13823(a) of P.L. 115-97.
382 IRC Section 1400Z-2(c) as instituted by Section 13823(a) of P.L. 115-97.
383 IRC Section 1400Z-2(b)(1)(B) as instituted by Section 13823(a) of P.L. 115-97.

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example, if a taxpayer sells property with a tax basis of $300,000 for $1 million
and timely invested $700,000 in a qualified opportunity fund Sept. 15, 2018,
and then sold the investment Sept. 16, 2028, for $1.7 million, the taxpayer’s basis
would be stepped up to $1.7 million and no gain would be taxed on the sale. The
taxpayer would have previously included $595,000 in income Dec. 31, 2026, and
received a basis increase of $700,000 (due to the seven-year hold benefit), so
the benefit of the 10-year provision effectively excludes any tax on appreciation
arising during the investment in the opportunity fund.
3. Qualified Opportunity Funds
A qualified opportunity fund is the investment vehicle through which a taxpayer

must invest gains to qualify for the opportunity zone deferral election.384 A
qualified opportunity fund can be any investment vehicle which is organized
as a corporation or a partnership for the purpose of investing in qualified
opportunity zone property.385
To qualify, an opportunity fund must be certified and must hold at least 90

percent of its assets in qualified opportunity zone property, determined by the
average of the percentage of qualified opportunity zone property held in the
fund as measured:
• on the last day of the first six month period of the taxable
year of the fund;386 and
• on the last day of the taxable year of the fund.387
If an opportunity fund fails to meet the 90 percent requirement, then the fund
must pay a penalty for each month it fails to meet the investment requirement.388
The penalty equals the amount of the shortfall, times the underpayment rate
under Section 6621(a)(2), which is currently 6 percent. No penalty is imposed if
the opportunity fund can demonstrate that its failure to meet the test was due

386 IRC Section 1400Z-2(d)(1)(A) as instituted by Section 13823(a) of P.L. 115-97.
387 IRC Section 1400Z-2(d)(1)(B) as instituted by Section 13823(a) of P.L. 115-97.
388 IRC Section 1400Z-2(f)(1) as instituted by Section 13823(a) of P.L. 115-97.

to reasonable cause.389 If the fund is a partnership, the penalty is taken into

account proportionately as part of each partner’s distributive share.390
Treasury is delegated the authority to promulgate rules for the certification

process.391 The legislative history intimates that the certification process for
a qualified opportunity fund will be administered in a manner similar to the
process for allocating the NMTC.392
Treasury is also delegated the authority to promulgate rules to ensure a qualified

opportunity fund has a reasonable period of time to reinvest the return of
capital from the sale or disposition of qualified opportunity zone property. 393
The statute does not prohibit qualified opportunity funds from receiving
investments from taxpayers that did not make an election to defer gain.
However, investments received without an election are not eligible for any of the
incentives under the program.394
4. Qualified Opportunity Zone Property
In general, qualified opportunity zone property investments that qualified

opportunity funds are required to hold consist of three possible groups:
• investments in qualified opportunity zone stock,

• investments in qualified opportunity zone partnership interests, or
• investments in qualified opportunity zone business property.395
For investments in stock and partnership interests:
• the investment must be acquired after Dec. 31, 2017, at original issue solely
in exchange for cash;
391 IRC Section 1400Z-2(e)(4)(A) as instituted by Section 13823(a) of P.L. 115-97.
392 See “P.L. 115-97 - Conference Report” Dec. 15, 2017, page 538.
393 IRC Section 1400Z-2(e)(4)(B) as instituted by Section 13823(a) of P.L. 115-97.

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• at the time of such investment, the corporation or partnership must be a

qualified opportunity zone business, or (for newly formed organizations)
have been organized for the purpose of being a qualified opportunity zone
business; and
• the corporation or partnership must remain a qualified opportunity
zone business for substantially all of the qualified opportunity
fund’s holding period. 396
For investments in opportunity zone business property:
• the property must be tangible property used in a trade or business;

• the property must be purchased from an unrelated party after
Dec. 31, 2017;397
• the original use of such property commences with the qualified opportunity
fund or the qualified opportunity fund must substantially improve such
property; and
• during substantially all of the qualified opportunity fund’s holding period for
such property, substantially all of the use of such property was in a qualified
opportunity zone.398
Under the statute, property is treated as substantially improved if during any

30-month period after acquisition of such property, additions to basis with
respect to such property in the hands of the qualified opportunity fund exceed
an amount equal to the adjusted basis of such property at the beginning of such
30-month period in the hands of the qualified opportunity fund.399
Unlike the NMTC, loans to qualified opportunity zone businesses are not
considered qualified opportunity zone property.400 This limitation will likely
exclude any nonprofit businesses from receiving any direct financing under
the program. However, preferred equity is expected to qualify, which should
396 IRC Section 1400Z-2(d)(2)(B) & (C) as instituted by Section 13823(a) of P.L. 115-97.
397 Related party is defined under the statute with reference to IRC Sections 267(b) and 707(b)(1) as modified
by IRC Section 1400Z-2(e)(2) to replace the 50% minimum relationship threshold with a 20% minimum
relationship threshold.
398 IRC Section 1400Z-2(d)(2)(D)(i) as instituted by Section 13823(a) of P.L. 115-97.
399 IRC Section 1400Z-2(d)(2)(D)(ii) as instituted by Section 13823(a) of P.L. 115-97.

allow a for-profit corporation or partnership to raise capital with certain debt-

like features.
5. Qualified Opportunity Zone Business
For an investment to meet the qualified opportunity zone property requirements

discussed above, the investee corporation or partnership must either be an
opportunity zone business or must be organized for the purpose of being one.401
To qualify, the business can be any trade or business:
• in which substantially all of the tangible property owned or leased

by the taxpayer is qualified opportunity zone business property
(as defined above);402
• in which at least 50 percent of the total gross income of such entity is derived
from the active conduct of such business;403
• in which a substantial portion of the intangible property of such entity is
used in the active conduct of any such business;404
• in which less than 5 percent of the average of the aggregate unadjusted
bases of the property of such entity is attributable to nonqualified financial
property;405 and
• which is not a private or commercial golf course, country club, massage
parlor, hot tub facility, suntan facility, racetrack or other facility used for
gambling, or any store the principal business of which is the sale of alcoholic
beverages for consumption off premises.406
Tangible property of a qualified opportunity zone business that ceases to be a

qualified opportunity zone business property shall continue to be treated as such
401 IRC Section 1400Z-2(d)(2)(B) & (C) as instituted by Section 13823(a) of P.L. 115-97.
402 IRC Section 1400Z-2(d)(3)(A)(i) as instituted by Section 13823(a) of P.L. 115-97.
403 IRC Section 1400Z-2(d)(3)(A)(ii) as instituted by Section 13823(a) of P.L. 115-97 and, by reference, IRC Section
1397C(b)(2).
1397C(b)(4).
1397C(b)(8).
406 IRC Section 1400Z-2(d)(3)(A)(iii) as instituted by Section 13823(a) of P.L. 115-97 and, by reference, IRC Section
144(c)(6)(B).

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for the lesser of five years after the date on which such property ceases to be so
qualified or the date on which the property is no longer held by the business.407
Similar to the NMTC, the opportunity zone incentive is expected to support

a wide range of business types. Unlike the NMTC, there appears to be no
prohibition for residential rental real estate businesses to qualify. However,
because of the tangible property requirement, investments in established
businesses may be limited. This is because of the requirement that substantially
all of the tangible property owned or leased by an opportunity zone business
must be opportunity zone business property. By definition, opportunity zone
business property must be property purchased after Dec. 31, 2017. Accordingly,
established businesses owning or leasing older assets may find it difficult to
meet this test.
407 IRC Section 1400Z-2(d)(3)(B) as instituted by Section 13823(a) of P.L. 115-97.

Conclusions VIII
VIII. Conclusions
On the surface, stakeholders breathed a sigh of relief as there were few direct
changes to tax credits due to the enactment of P.L. 115-97. The law preserved
the LIHTC, the tax exemption for PABs, the 2018 and 2019 NMTC allocation
application rounds, and existing phasedowns for the ITC and PTC. While the
final law retained the 20 percent HTC, albeit with significant modifications, it
did eliminate the 10 percent non-historic rehabilitation credit.
Indirect changes will have more of an effect on tax credits as the law reduced
the top corporate tax rate to 21 percent, allowed a 20 percent deduction for
pass-through companies, and eliminated the corporate alternative minimum
tax, among other provisions. Also of note is the switch to chained-CPI as a
measure of inflation. As illustrated in this guide, these measures may have
the indirect effect of limiting future LIHTC production and investment in
the various credits.
In addition to the change to the corporate tax rate, the BEAT should be counted
among the tax reform provisions that will have an effect on tax credits. The
provision in its final form allows LIHTC, ITC and PTC investors to generally
benefit from at least a portion of their tax credits for tax years between
2018-2025, in spite of owing a BEAT liability. After 2025, however, corporations
may find that as much as 100 percent of their LIHTCs and RETCs do not reduce
their BEAT obligation. For HTCs and NMTCs, starting in 2018, corporations
may find that as much as 100 percent of their HTCs and NMTCs do not reduce
their BEAT liability.
There was good news in the form of the newly created opportunity zones
which incentivizes will bring private investment in economically distressed
communities. But, as in other areas of tax reform, further clarification is needed
before the benefits of this incentive can be realized.
Going forward, tax credit stakeholders will have to evaluate and weigh the
changes described herein when determining their next steps. Numerous
transition rules in P.L. 115-97 demand further amplification and the need for
interpretation and clarification of various provisions makes it difficult to fully

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VIII Conclusions
gauge the long-term effect of tax reform on the tax credit industry at this time.
Furthermore, it may be some time before any unintended consequences of the
law come to light and when they do, they will need to be addressed.

Index IX
IX. Index
Symbols
179 deductions 3, 4, 5, 61
A
ADS recovery period 8
advance payments 17
alternative minimum taxable income (AMTI) 25
alternative minimum tax (AMT) 25
applicable partnership interests 20
applicable trade or business 20
B
Base Erosion and Anti-Abuse Tax (BEAT) 25
bonus depreciation 5
business interest expense 9
C
cash method 18
Chained Consumer Price Index for all Urban Consumers (chained CPI ) 22
community development entities (CDEs) 69
Consumer Price Index for all Urban Consumers (CPI) 22
corporate AMT 25
corporate tax rate 1, 24, 25, 42, 70, 76, 77, 87, 90, 102
cost recovery changes 2
D
deduction of business losses 37
depreciable lives 7
E
excess business interest 11
excess taxable income 11

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IX Index
G
generally accepted accounting principles (GAAP) 16
gross receipts test 18
H
hypothetical liquidation at book value (HLBV) 88
I
income tax brackets 34
individual AMT 38
M
Modified Accelerated Cost Recovery System (MACRS) 67
modified taxable income 26
N
net operating loss (NOL) 10
nonshareholder capital contributions 52
O
opportunity zone business 100
orphaned renewable energy technologies 76
P
PAB 23, 41
phaseout 3, 4, 75
Private activity bond (PAB) 23
Q
qualified active low-income community businesses (QALICBs) 69
qualified business income 28
qualified improvement property (QIP) 7
qualified leasehold improvement property (QLIP) 62
qualified opportunity fund 97
qualified opportunity zone 92
qualified opportunity zone property 98

Index IX
qualified rehabilitation expenditures (QREs) 54

qualified trade or business income 29
R
real property trade or business 8, 14, 44, 46, 48
S
specified service businesses 31
substantial built-in loss 32
T
Taxable Year of Inclusion 15
technical termination 33
tiered partnerships 13
transition rule 58
V
volume cap LIHTCs 40

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X Appendix/Reference Documents
X. Appendix/Reference Documents
A. Comparison Chart
Comparison of Major Provisions Before, After Passage of Tax Cuts and Jobs Act
PREVIOUS LAW NEW LAW
Volume Cap Low-Income
$2.35 per capita/$2.71 million small state
Housing Tax Credits Retained
minimum (2017)
(LIHTC)
Private Activity Bonds $100 per capita/$305 million small state
All PAB, including residential rental, retained
(PAB) minimum (2017)
4 Percent PAB LIHTC $3-4 billion a year 4 percent PAB LIHTC 4 percent PAB LIHTC retained
LIHTC Basis Maximum basis boost = 30 percent No changes
In general, buildings must be made available
to income-qualified members of the general
public without special preference, except for
developments targeting households:
LIHTC-General Public Use
• With special needs, No changes
Requirement
• Who members of a specified group under
federal or state affordable housing program or
policy, or
• Who are involved in artistic or literary activities
New Markets Tax Credit $3.5 billion annual allocation for 2018 and 2019,
2017, 2018 and 2019 rounds retained
(NMTC) 39 percent credit, slated to expire after 2019
Investing in Opportunity Creates new incentive to invest capital gains in low-
No provision
Act income communities
Historic Rehabilitation Tax 20 percent credit claimed when certified historic 20 percent credit retained, but claimed over 5 years,
Credit (HTC) property is placed in service after 2017, subject to transition rules
Non-Historic Rehabilitation 10 percent credit, for nonresidential buildings
REPEALED after 2017 subject to transition rules
Tax Credit placed in service before 1936
Renewable Energy
30 percent ITC, phases down after 2019, 30 percent ITC, phase down after 2019 retained,
Investment Tax Credit
10 percent ITC - “Permanent” 10 percent ITC retained
(ITC)
Orphan Renewable Energy ITC “Orphan” Renewable Energy Technologies ITC “orphan” renewable energy technologies remain
Technologies expired after 2016 expired
Renewable Energy
PTC phase down starting after 2016, PTC @ 2.4 PTC phase down starting after 2016, PTC at 2.4 cents
Production Tax Credit
cents per kWh per kWh retained
(PTC)
PTC Continuous No continuous construction requirement for
Retained
Construction Requirement projects completed by 2020
Top corporate rate of 21 percent tax years beginning
Corporate Rate Top corporate rate of 35 percent
after Dec. 31, 2017
Business Income Taxation
Individuals may generally deduct 20 percent of qualified
(Individuals) (Pass- Subject to individual income tax rates
business income (until Dec. 31, 2025)
throughs and Schedule C)

Appendix/Reference Documents X
Business Interest Expense Limited to 30 percent of business adjusted taxable
No limit
Deduction income, real estate businesses can elect out
100 percent expensing for new and used property
50 percent bonus depreciation, phased down investments made after Sept. 27, 2017, through Dec. 31,
Expensing
through 2019 for new property 2022, phases down through Dec. 31, 2026, buildings not
eligible, real estate businesses are eligible
Comparison of Major Provisions Before, After Passage of Tax Cuts and Jobs Act
PREVIOUS LAW NEW LAW
Modified Accelerated Cost Recovery System
(MACRS): MACRS – Residential and nonresidential real property
residential rental real property - 27.5 years, depreciation life unchanged.
Property Depreciation site improvements – 15 years, ADS 30 year for residential and 40 year for
personal property – 5 years, nonresidential real property if elect out of business
Alternative Depreciation System (ADS): real interest expense deduction limitations
property – 40 years
Real estate businesses can elect out of limitation on
interest deductibility.
No limit
Interest Deductibility But, ADS as modified to 30-year cost recovery for
ADS – 40-year cost recovery for real property
residential real property and 40-year cost recovery for
nonresidential real property would apply
Changes to “chained CPI,”
Consumer Price Index for all Urban Consumers
Inflation Factor future 9 percent LIHTC allocations and volume cap for
(CPI-U)
tax-exempt private activity bonds REDUCED
5-6 percent - 2018, 10-11 percent – 2019-2025, then
12.5-13.5 percent tax rate after 2025
Base Erosion and Anti-
N/A Corporations generally benefit from at least 80
Abuse Tax (BEAT)
percent of LIHTC, ITC, and PTC until 2026.
NMTC and HTC cannot offset BEAT liability
Repealed for corporations;
Increased exemption and phase-out thresholds for
20 percent for corporations
Alternative Minimum Tax individuals until Dec. 31, 2025
28 percent for individuals
Note: LIHTC, HTC and ITC canbe taken against AMT
liability, but NMTC and years 5 through 10 of PTC cannot
Source: Novogradac & Company LLP

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B. P.L. 115-97 of 2017

Section 11001 (a)
Section 11002 (a), (e)
Section 11011 (a)
Section 11012
Section 12001 (a)
Section 12002 (a), (d)
Section 12003 (a)
Section 13001 (b)
Section 13101 (a), (b), (d)
Section 13102 (a)
Section 13201 (a), (c), (d) (e), (h)
Section 13204 (a), (b)
Section 13221 (a), (b), (d)
Section 13301 (a)
Section 13302
Section 13309 (a), (c)
Section 13312 (b)

Section 13402 (a), (c),
Section 13502 (a), (b)
Section 13503 (b)
Section 13504(a)
Section 13823 (a)
Section 14401 (a), (e)

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C. Relevant Sections of Internal Revenue Code

LIHTC
NMTC
RETC
Energy Credit
Advanced Energy Credit
Production Tax Credit
HTC
Section 1 (f)
Section 1061 (a), (b), (c),
Section 11 (b)
Section 118 (b)
Section 1256 (e)
Section 1400Z-1
Section 1400Z-2
Section 146 (d)
Section 163 (j)
Section 168 (b), (e), (g), (k)
Section 172 (a)

Section 179 (a)

Section 179 (b)
Section 179 (d)
Section 179 (f)
Section 199A
Section 42 (e), (h)
Section 448 (a), (c), (d)
Section 451 (b), (c)
Section 461 (i), (l)
Section 47 (a), (c)
Section 50 (c)
Section 55 (b), (d)
Section 59A (b), (e)
Section 704 (b), (d)
Section 708 (b)
Section 743 (d)
Section 754

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D. Relevant Sections of the Conference

Report to Accompany H.R. 1
Page 385-392
Pages 364-365
Pages 537-540
E. Relevant Sections of the Joint Explanatory

Statement of the Committee of Conference
Page 39
Page 370

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Cover Photo: Courtesy of Christian Phillips Photography

©2018 Novogradac & Company LLP. All Rights Reserved.

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vi 2018 Novogradac Tax Reform Resource Guide

Tony Grappone is a partner in the Boston office of Novogradac & Company

Peter Lawrence is Novogradac & Company’s director of public policy and

George Littlejohn is a partner in the Austin, Texas, office of Novogradac &

Novogradac & Company LLP

viii 2018 Novogradac Tax Reform Resource Guide

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C. Noncorporate Tax Changes 29

x 2018 Novogradac Tax Reform Resource Guide

III. Low-Income Housing Tax Credit 41

IV. Historic Tax Credit and

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V. New Markets Tax Credit 70

VI. Renewable Energy Tax Credits 76

xii 2018 Novogradac Tax Reform Resource Guide

VII. Opportunity Zones 92

VIII. Conclusions 103

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Lower tax rates for businesses by:

• reducing the corporate tax rate from 35 to 21 percent,

Simplify and reform rates, standard deductions and exemptions for

• providing a larger standard deduction and child tax credit,

Move toward a territorial system of taxation where primarily income earned in

Five major tax incentive areas are specifically addressed:

• Low-income housing tax credit (LIHTC)

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• Renewable energy tax credits (RETCs)

2 2018 Novogradac Tax Reform Resource Guide

II. General Tax Changes

A. General Business Tax Changes

1. Cost Recovery Changes

P.L. 115-97 intends to improve investment through changes to how businesses

a) Section 179 Expensing

1 IRC Section 179(b)(1), as amended by Section 13101(a)(1) of P.L. 115-97.

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However, the availability of 179 deductions are subject to phaseouts based on

Particularly noteworthy is that the phaseout limitations based on the amount

Both the maximum deduction and the phaseout amount are

4 2018 Novogradac Tax Reform Resource Guide

depreciated as distinct depreciable assets. Qualified real property includes

For property owned by a business operating residential rental property, only

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b) 100 Percent Bonus Depreciation

PLACED IN SERVICE APPLICABLE PERCENTAGE

After Dec. 31, 2022 before Jan. 1, 2024 80 percent

Certain qualified property with a longer production period would gain an

Property qualifying for bonus depreciation was largely undisturbed by P.L.

13 Section 13101(d) of P.L. 115-97.

6 2018 Novogradac Tax Reform Resource Guide

for bonus depreciation.19 Finally, property depreciated using the alternative

For taxpayers desiring to either avoid or reduce their bonus depreciation,

Somewhat intriguingly, the details around the election to apply 50 percent

c) Real Property Depreciable Life

19 IRC Section 168(k)(2)(A)(i)(IV).

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QIP includes any improvement to an interior portion of a building that is

8 2018 Novogradac Tax Reform Resource Guide

The changes made to depreciable lives will apply to properties placed in

2. Business Interest Expense Limitation