IRS Guidance on 4% Floor

Internal Revenue Code Section 42(b)(3) was added to Section 42 by the Taxpayer Certainty and Disaster Relief Act of 2020 and provides a minimum 4% credit rate (4% floor) for buildings that are placed in service after December 31, 2020.  The 4% floor applies to (1) any building that receives an allocation of housing credit dollar amount after December 31, 2020, and (2) any building any portion of which is financed by tax-exempt bonds issued after December 31, 2020.

The IRS guidance clarifies when an allocation of a housing credit dollar amount after December 31, 2020 and when a tax-exempt bond issued after December 31, 2020 will qualify a building for the 4% floor.

Specific Guidance:
The IRS has issued Revenue Ruling 2021-20 that clarifies when the 4% floor applies in three situations.  The 4% floor does not apply:

  • when a building placed in service after 2020 is partially financed by a pre-2021 draw-down exempt facility bond issue that has had draws taken after December 31, 2020 (because the draws taken after December 31, 2020 are considered to be part of the 2020 issue);
  • when a building was partially financed with exempt bond issue in 2020 and then a de minimis exempt bond issue after 2020; or
  • when a building received a housing credit allocation in 2020 and then a de minimis additional allocation after 2020.

The IRS has also issued Revenue Procedure 2021-43 that provides safe harbors for determining whether an exempt facility bond issue that is issued after December 31, 2020, or an allocation of a housing credit dollar amount that is made after December 31, 2020 is more than de minimis for purposes of Revenue Ruling 2021-20.

  • An exempt facility bond issue issued after December 31, 2020 is not de minimis if the aggregate amount of the post-2020 obligations is at least 10% of the total amount of all exempt bonds that finance the building and are subject to the volume cap.
  • An allocation of credits after December 31, 2020 is not de minimis if the allocation is at least 10% of the total allocations to the building that have been made on or before the date of the allocation in question.