First-Year LIHTC Tax Returns: Avoid These Costly Errors

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.