What is a 10% Test?
One major milestone for all entities that have received an award of low-income housing tax credits (LIHTC) and want to execute a Carryover Allocation Agreement is passing the 10% Test. To pass the 10% Test, a development must incur at least 10% of the costs that fall under the definition of reasonably expected basis (REB) by the date noted in their state’s tax credit allocation guidelines. The failure to satisfy the 10% Test can result in a development forfeiting its credits. Therefore, it is crucial for the development to pass the 10% Test.
Who Needs a 10% Test?
Developments must be placed in service, meaning suitable for occupancy, in the year that the tax credit allocating agency (TCAA) awards the LIHTC. With an average construction period of 9-18 months, this is a challenge for developments to be placed into service by this timeline. In order to extend the placed in-service date, a development may obtain a Carryover Allocation Agreement. This Carryover Allocation Agreement will extend the placed in-service date to the end of the second calendar year after the year the LIHTCs are awarded. To have a valid Carryover Allocation Agreement executed, passing the 10% Test is critical.
What is REB?
As mentioned above, 10% of REB must be incurred by the date noted by the state’s tax credit allocation guidelines. Therefore, it is important to understand REB. REB is the estimated land and depreciable property (not just basis eligible property) expected to be part of the development.
It is important to be proactive if a date noted by the state’s tax credit allocation guidelines will be unable to pass the 10% Test. An option to incur more REB would be to buy stored materials to incur additional costs, which comes with its own set of requirements. Another option is to reach out to the TCAA and request a reallocation of LIHTCs.
Remember, the 10% Test is just one of many milestones in the tax credit process. To learn about additional milestones, please refer to the article “10% Tests, 50% Tests, and Cost Certifications – What’s the Difference?”
The information presented in this post is intended solely for informational purposes and should not be construed as accounting advice from McKonly & Asbury, LLP.
McKonly & Asbury is a leader in accounting for affordable housing developments in Pennsylvania. IRS and PHFA regulations require specialized knowledge when preparing a 10% Test. This test is critical in the tax credit process, and it is important to work with someone who has the experience and expertise to ensure that your Test is accurate and your credits are not lost. The M&A Team has the audit and tax expertise, as well as the experience needed to complete an accurate 10% Test. For more information, please contact our Affordable Housing team at affordablehousing@macpas.com.
Additionally, be sure to save the date for our upcoming Fall 2024 Affordable Housing Seminar. The Affordable Housing Seminar will be hosted by A.J. Johnson, President of A.J. Johnson Consulting Services, Inc., and will be held in-person on November 7, 2024. More details will be available this fall, so save the date!
About the Author
Claire joined McKonly & Asbury in July 2019 and is currently a Manager with the firm. She is a member of the firm’s Audit & Assurance segment, servicing clients in the nonprofit and affordable housing industries. Outside of work, C… Read more
