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Technical Guidance

Michigan Low-Income Housing Tax Credit
Technical Guidance

Technical Guidance for MI LIHTC Investors

State Credit Period:

  1. Purpose. This rule clarifies the meaning of “first year of the credit period” for purposes of MI LIHTC and ensures that buildings placed in service late in a calendar year are not penalized with respect to first-year credits.
  2. State credit period defined. The “credit period” for purposes of MI LIHTC means the period of six calendar years beginning with the calendar year in which a building that is part of a qualified project is placed in service, as provided in MCL 125.1422e(9)(i).
  3. First year of the credit period. The “first year of the credit period” means the first calendar year of the six-year state credit period as defined in subrule (3) of this rule. For the avoidance of doubt:
    1. The first year of the credit period is the entire calendar year in which the building is placed in service, regardless of the month or date within that calendar year on which the building is placed in service.
    2. The full annual MI LIHTC amount as stated on the eligibility statement or approval notice applies for the first calendar year of the state credit period, without proration based on the portion of the calendar year during which the building was in service.
  4. Non-application of IRC section 42(f)(2). In accordance with MCL 125.1422e(9)(i), the special rule for the first year of the credit period under section 42(f)(2) of the Internal Revenue Code does not apply for purposes of the state tax credit (MI LIHTC). The prorated first-year credit calculation applicable under section 42(f)(2) of the Internal Revenue Code for federal credit purposes shall have no effect on the amount of the MI LIHTC claimable for the first year of the state credit period.
  5. Safe harbor recognition. A building that is part of a qualified project and that meets the safe harbor under section 42(g)(3)(A) of the Internal Revenue Code at the close of the first year of the federal credit period, as defined in MCL 125.1422e(9)(l), shall be treated for purposes of MI LIHTC as having continuously satisfied the applicable minimum set-aside requirement for the duration of the state tax credit period that may begin the prior year to the federal credit period when all applicable buildings for a qualified project are placed into service.
  6. Relationship to federal credit period. The MI LIHTC period under MCL 125.1422e(9)(i) is distinct from the federal credit period under section 42(f)(1) of the Internal Revenue Code, 26 USC 42, which is a 10-year period. The first year of the state credit period may or may not coincide with the first taxable year of the federal credit period. For purposes of the safe harbor recognition, the reference to the “first year of the federal credit period” means the first taxable year of the 10-year federal credit period under section 42(f)(1) of the Internal Revenue Code.

 

State Credit Deferral:

  1. Purpose. This rule implements the deferral provisions in MCL 206.281(2), MCL 206.678(2), and MCL 500.476a(9) (collectively, the “deferral provisions”), which permit a qualified taxpayer to defer claiming the state tax credit until the tax year in which the eligibility statement for the qualified project is issued. This rule establishes a coordinated framework between the Authority and the Department of Treasury for the administration of deferral elections.
  2. Eligibility for deferral. A qualified taxpayer may elect to defer claiming MI LIHTC if all of the following conditions are met:
    1. The owner of the qualified project has received an approval notice from the Authority;
    2. The owner has submitted a final cost certification and a request for an eligibility statement to the Authority; and
    3. The Authority has not yet approved the final cost certification and issued the eligibility statement to the owner.
  3. Deferral election.
    1. A qualified taxpayer who meets the requirements of subrule (2) may elect either of the following:
      1. Claim MI LIHTC on the qualified taxpayer’s annual return for the tax year prescribed under MCL 206.281(1), MCL 206.678(1), or MCL 500.476a(8), as applicable, by attaching a copy of the approval notice for the qualified project; or
      2. Wait to claim MI LIHTC on the qualified taxpayer’s annual return for the qualified taxpayer’s tax year in which the eligibility statement for the qualified project is issued by the Authority.
    2. A qualified taxpayer who elects to defer under subrule (3)(a)(ii) must claim MI LIHTC on the return for the tax year in which the eligibility statement is actually issued. No further deferral or indefinite postponement of the credit claim is permitted beyond that tax year.
  1. Application to all years of the credit period. A deferral election under this rule applies to all years of the state credit period for the qualified project. A qualified taxpayer may not selectively defer the credit for individual years within the credit period while claiming the credit for other years on the basis of the approval notice. Upon issuance of the eligibility statement, the qualified taxpayer shall claim all deferred credits on the return for the tax year in which the eligibility statement is issued, subject to the carryforward provisions of MCL 206.281(5), MCL 206.678(5), or MCL 500.476a(8), as applicable.
  2. Notification requirements.
    1. A qualified taxpayer electing deferral shall provide written notice of the election to both the Authority and the Department of Treasury, in a form and manner prescribed by the Authority in consultation with the Department of Treasury, no later than the due date (including extensions) of the qualified taxpayer’s annual return for the first tax year for which the deferral is elected.
    2. The notice required under subrule (5)(a) must include: the name, address, and taxpayer identification number of the qualified taxpayer; the name and address of the qualified project; the approval notice number; and a statement that the qualified taxpayer elects to defer claiming MI LIHTC pending issuance of the eligibility statement.
    3. The designated reporter shall note the deferral election on the allocation report submitted to the Department of Treasury under MCL 125.1422e(8).
  1. Interaction with carryforward provisions. The 10-year carryforward period under MCL 206.281(5), MCL 206.678(5), or the applicable provision of MCL 500.476a begins in the tax year in which the qualified taxpayer is required to claim the credit, whether on the basis of the approval notice under the standard claim method or on the basis of the eligibility statement under a deferral election. A deferral election does not extend or restart the 10-year carryforward period.
  2. Coordination with federal credit deferral. To the extent a qualified taxpayer defers claiming the federal LIHTC pursuant to section 42 of the Internal Revenue Code or applicable Treasury regulations, the deferral of MI LIHTC under this rule may, but is not required to, be coordinated with such federal deferral. The state deferral election under this rule is independent of any federal deferral and is governed solely by the enabling legislation and these rules.
  3. Authority and Department of Treasury coordination. The Authority and the Department of Treasury shall establish joint administrative procedures for the processing of deferral elections, including procedures for the exchange of information regarding the status of final cost certifications, the issuance of eligibility statements, and the filing of returns reflecting deferred credits.

 

4% Qualified Project

  1. Purpose. This rule clarifies the definition of “4% qualified project” under MCL 125.1422e(9)(o), the interaction between MI LIHTC and bond-financed projects, and the application and review procedures applicable to 4% qualified projects.
  2. Definition. A “4% qualified project” means a qualified project that is eligible for both of the following:
    1. A federal LIHTC under section 42(h)(4) of the Internal Revenue Code, 26 USC 42; and
    2. A bond issued under section 44c of the State Housing Development Authority Act of 1966, 1966 PA 346, MCL 125.1444c, in which the Authority is not the bondholder with respect to the bond proceeds.
  3. [25%] aggregate basis test. For purposes of eligibility as a 4% qualified project, the project must satisfy the requirement under section 42(h)(4)(B) of the Internal Revenue Code that the aggregate basis of the building and the land on which the building is located that is financed by the proceeds of tax-exempt bonds is [25%] or more of the aggregate basis of the building and land. Compliance with this requirement shall be determined in accordance with applicable federal law and Internal Revenue Service guidance.
  4. Volume cap requirements. The tax-exempt bonds financing a 4% qualified project must be issued within the volume cap allocated to the issuing authority under section 146 of the Internal Revenue Code, 26 USC 146, and applicable state law governing the allocation of private activity bond volume cap. The Authority may require documentation of volume cap allocation as a condition of approving an application for a housing opportunity tax credit for a 4% qualified project.

 

Investor Assignments:

  1. Purpose. This rule clarifies the rules governing the assignment of ownership interests in qualified projects and the allocation of MI LIHTC among members of flow-through entities, including assignments to state credit limited partners that are not allocated federal LIHTC with respect to the same qualified project.
  2. Flow-through entity allocation. In accordance with MCL 125.1422e(6), the owner of a qualified project that is a flow-through entity may allocate all or a portion of MI LIHTC attributable to a qualified project to some or all of its members in any manner agreed to by its members, subject to the following:
    1. The allocation may be made regardless of whether that member is allocated or allowed any portion of any federal LIHTC with respect to the same qualified project.
    2. The allocation need not have substantial economic effect within the meaning of section 704(b) of the Internal Revenue Code, 26 USC 704.
    3. The allocation may be made regardless of whether the member is deemed a partner for federal income tax purposes.
  3. Assignment of interests. A member of a flow-through entity that is allocated or receives a pass-through of MI LIHTC may assign all or any part of its interest in the flow-through entity, and the assignee may subsequently be allocated credits from the flow-through entity, in accordance with MCL 125.1422e(6).
  4. Notice to assignees. Any flow-through entity allocating all or a portion of MI LIHTC under MCL 125.1422e(6) shall provide the recipient with a copy of the eligibility statement or, if the Authority has not yet issued an eligibility statement, the approval notice for the qualified project. If a copy of the approval notice is provided and an eligibility statement is subsequently issued, the person who allocated the credit shall provide the recipient with a copy of the eligibility statement within 30 days of receipt.
  5. Notification to the Authority. The owner of a qualified project shall notify the Authority, in a form and manner prescribed by the Authority, of any assignment of an interest in the flow-through entity that affects the allocation of MI LIHTC, within 30 days of the effective date of such assignment. The notification must include the name, address, and taxpayer identification number of the assignee, the percentage interest assigned, and the amount of the state tax credit to be allocated to the assignee.
  6. Compliance obligations not affected. An assignment of an interest in a flow-through entity under this rule does not alter, diminish, or relieve the owner of a qualified project from any compliance obligation under the regulatory agreement, the extended use agreement required by section 42(h)(6) of the Internal Revenue Code, or any other applicable federal or state requirement. The owner remains responsible for all reporting, compliance monitoring, and recapture obligations regardless of any assignment.

 

Investor Dispositions:

  1. Purpose. This rule establishes a framework for investor exit at the conclusion of the six-year MI LIHTC period, recognizing that the state credit period is shorter than both the 10-year federal credit period under section 42(f)(1) of the Internal Revenue Code and the 15-year federal compliance period under section 42(i)(1) of the Internal Revenue Code. This rule is intended to facilitate orderly investor exit while preserving ongoing compliance with federal affordability requirements, extended use agreement obligations, and the terms of the regulatory agreement.
  2. Preservation of federal compliance. Any exit mechanism or transaction involving the transfer, redemption, or disposition of an investor’s direct interest in a flow-through entity that is the owner of a qualified project must include provisions ensuring continued compliance with:
    1. The affordability requirements under section 42 of the Internal Revenue Code for the duration of the federal compliance period;
    2. The extended use agreement required under section 42(h)(6) of the Internal Revenue Code, including, if required by the Authority, a provision that the exception under section 42(h)(6)(E)(i)(II) of the Internal Revenue Code does not apply for state credit purposes, as provided in MCL 125.1422e(5);
    3. The terms of the regulatory agreement between the owner and the Authority, including the preference for maximizing long-term affordability as required by MCL 125.1422e(5); and
    4. All applicable federal and state reporting and monitoring requirements.
  3. Authority approval required. No exit transaction involving the transfer, redemption, or disposition of an investor’s direct interest in the owner of a qualified project shall be consummated without the prior written approval of the Authority. The request for approval shall be submitted to the Authority in a form and manner prescribed by the Authority and must include:
    1. A description of the proposed exit transaction, including the identity of the transferee (if any) and the terms of the transfer;
    2. Evidence that the proposed transaction will not impair ongoing compliance with the requirements listed in subrule (2);
    3. A certification from the owner that all federal and state compliance requirements will continue to be satisfied following the exit transaction; and
    4. Any additional information or documentation required by the Authority.
  1. State credit recapture implications.
    1. An exit transaction that does not result in a recapture event under section 42 of the Internal Revenue Code shall not, solely by reason of the exit, result in a recapture of MI LIHTC under MCL 206.281(3), MCL 206.678(3), or MCL 500.476a(10).
    2. An exit transaction that results in a recapture event under section 42 of the Internal Revenue Code shall result in a corresponding recapture of the MI LIHTC, with the percentage of the state credit subject to recapture being equal to the percentage of the federal credit subject to recapture or otherwise disallowed during the same tax year.
  1. State credit limited partner. An exit or assignment of interest by the entity claiming the state credit that is not a direct partner in the flow-through entity may exit without the prior written approval of the Authority.
  2. Ongoing reporting obligations. Following an exit transaction:
    1. The owner shall continue to comply with all reporting obligations under MCL 125.1422e(7) and (8), including the submission of allocation reports and notification of recapture events.
    2. The designated reporter shall continue to provide allocation reports to the Department of Treasury for each remaining year of the state credit period, if any.
    3. The exiting investor shall retain all records necessary to substantiate MI LIHTC previously claimed for the period required by applicable law.