Blog

The first year tax return filing of a LIHTC (Low-Income Housing Tax Credit) partnership is a critical compliance and planning milestone, especially as it relates to low income housing tax credits, historic rehabilitation tax credits, energy credits, bonus depreciation, and first year elections. Here’s why each area is so important: Low Income Housing Tax Credits (LIHTC) The first-year filing certifies the project’s eligibility, establishes the eligible and qualified basis, and determines the start of the credit period. The credit is prorated in the first year based on the number of months the building is in service, and the filing sets the foundation for the 10-year credit period. Failure to properly file and certify can result in denial of the credit, making this filing foundational for the entire credit period. Historic Rehabilitation Tax Credits When a project also qualifies for historic rehabilitation credits, the first-year return sets the placed-in-service date for both credits, determines the timing and allocation of credits, and documents compliance with IRS requirements for partnership structure and credit allocations. The basis for LIHTC is reduced by the amount of the historic credit, so accurate first-year reporting is essential to avoid errors or double counting. Errors or omissions can result in disallowance or recapture of credits. Energy Credits The first-year filing establishes the placed-in-service date for both LIHTC and energy credits (such as the 45L energy credit), determines the correct basis for each credit (with the energy credit reducing the depreciable basis but not the LIHTC basis), and sets the credit periods for future filings. Proper elections and documentation ensure compliance, maximize credit benefits, and reduce the risk of recapture or IRS challenge in subsequent years. Bonus Depreciation The first-year return is the only opportunity to make or elect out of bonus depreciation for property placed in service that year. This decision directly affects the partnership’s tax deductions, eligible basis, and the calculation of LIHTC. The election must be made on a timely filed return and is generally irrevocable, making accuracy and timeliness essential. Overstating depreciation can reduce the partnership’s tax basis in the property, potentially impacting the amount of LIHTC available and the timing of credits allocable to investors. First Year Elections The first-year return is when the partnership must make irrevocable elections and provide required certifications that establish the foundation for the credit calculation and compliance for the entire credit period. These include certifying the placed-in-service date, eligible and qualified basis, the applicable fraction, and the start of the credit period, as well as filing Form 8609 for each building. Failure to make these elections or certifications can result in denial of the credit unless reasonable cause is demonstrated. There are also reporting elections to be made during the first year that specifies the policy for the accrual, capitalization, or amortization of certain expenditures. First year elections in these areas are critical because they often represent a one-time or annual opportunity to set the tax treatment for significant costs. Missing or mishandling these elections can result in lost deductions, less favorable tax timing, or the need for IRS consent to change methods in future years. Properly making these elections in the first year ensures optimal tax benefits and compliance for the partnership. In summary, the first year tax return filing for a LIHTC partnership is the foundation for all future compliance and calculations. It is the only opportunity to make certain elections, establish eligibility, and set the basis for all credits and deductions. Errors or omissions in this filing can have long-term negative consequences, including denial or recapture of credits and loss of tax benefits.

Year 15 is a crossroads: refinance, sell, transfer, or restructure—each path has tax and compliance implications. Map your options early Start modeling at Year 12–13. Review capital accounts, deferred developer fee status, and any soft-loan covenants. Align your plan with the extended use period and state requirements. Common paths GP/NP buyout of investor interests Refinance and reinvest in rehab Transfer under a qualified contract (where allowed) Sale to a mission-aligned owner Tax considerations Potential gain recognition, depreciation recapture, and capital account effects can surprise owners who wait too long. Anticipate these outcomes and structure agreements that match your goals. Operations still matter Keep compliance strong through exit. Clean files and steady financials support valuations and reduce friction. Considering options? Build a Year-15 plan that protects mission and financial outcomes.

If you manage a LIHTC property or a nonprofit housing organization, annual affordable housing audits are part of the rhythm of operations. Think of them as a structured checkup: confirming the story your financials tell, satisfying investor and lender requirements, and laying the groundwork for smooth filings and compliance. Why these audits matter Audits reassure partners that cash, reserves, and project activity align with program rules. They’re often required by state agencies, lenders, or investor agreements. For properties from Mid City Baton Rouge to Houston’s East End—and rural communities like Delhi and Tallulah—clear planning keeps the process efficient. What your auditor will request Expect a PBC (prepared-by-client) list that includes the trial balance, bank statements, debt agreements, management agreements, invoices for larger spend items, and support for specialized items such as developer fees, surplus cash, and restricted escrows. If your project has HUD components, your auditor will map accounts to HUD templates to streamline REAC reporting. Typical timeline Planning call and PBC list Fieldwork (on-site or remote) Partner and lender tie-outs 4. Delivery of audited financial statements and management letter Common findings—and how to prevent them Unreconciled reserves, unposted accruals, and incomplete tenant support are frequent culprits. Set monthly close deadlines, reconcile bank accounts, and review accounts receivable. If you’re approaching placed-in-service, start organizing documentation for cost certification now so the final audit moves quickly. Make next year easier Close your books on a predictable cadence, review year-end journal entries, and keep accurate records. Tie this workflow to your team’s calendar so partners, investors, and auditors stay aligned. Want a smoother audit cycle and fewer last-minute surprises? Our team can help you plan the year, not just the audit.

The LIHTC cost certification is the final cost audit that supports IRS Form 8609 issuance. Do it right, and investor equity and credits flow on time. Do it late—or incorrectly—and the project can stall right when it needs momentum. Milestones to watch Construction completion and punch list Final draw and retainage release As-built budgets and change orders Placed-in-service dates by building Final sources and uses Documents to assemble early Contracts and all amendments, pay apps and change orders, lien waivers, architect/engineering invoices, permit/impact fees, developer fee schedule and payments, land/closing files and other permanent documents, loan statements or history, draw schedules, and settlement statements. Organize by cost code or draw, and keep track related-party transactions. State agency nuances Louisiana , Mississippi , Arkansas , Alabama, Tennessee, Oklahoma, and Texas each have checklists and formats. Expect different eligible basis treatments, developer fee and contractor limit caps, and documentation preferences. Start with the strictest checklist so one binder works everywhere. How to speed acceptance Reconcile construction draws to the GL; tie contracts to change orders; separate soft costs consistently; document developer fee calculations; and make it easy for reviewers to verify totals. Coordinate timing with lenders and investors so 8609s can be requested as soon as reports are issued. Closing out construction soon? Line up your audit now so equity and credits land when you need them.