Pennsylvania now provides a state tax credit of up to 50% of a taxpayer’s qualified tax liability for a single taxable year (the “State Credit”) under Act 107 of 2020 (the “Act”). The Act amends the Tax Reform Code of 1971, 72 P.S.§§ 7101 et seq. (the “Code”) by adding a new Article XIX-G. The State Credit mirrors and may be used in conjunction with the federal Low- Income Housing Tax Credit (the “Federal Credit”) to promote affordable housing in the Commonwealth. The Federal Credit is available under section 42 of the Internal Revenue Code of 1986 (the “IRC”), 26 U.S.C. § 42, and is awarded by the federal government for states to benefit taxpayers who acquire, rehabilitate or newly construct affordable housing. According to the Senate Co-Sponsorship Memorandum posted January 30, 2019 (the “Memo”), the Federal Credit “is the main vehicle for the creation and preservation of affordable rental housing in the Commonwealth and across the nation.” The Act was approved with bi-partisan support and designed to incent with State Credits the creation of new and preservation of existing affordable rental housing in our Commonwealth which has a shortage of low-income residential units.
The State Credit will be administered by the Pennsylvania Housing Finance Agency (the “Agency”) and the Pennsylvania Department of Revenue (the “Department”). The Agency presently awards Federal Credits transferred by federal government to the Commonwealth for administration by the Agency. For State Credits, the Agency is authorized to review applications submitted by taxpayers who or which develop or own a Qualified Low-Income Housing Project (each, a “Project”) as that term is known in section 42(G)(1) of the IRC, 26 U.S.C.§ 42(g)(1).
Such a Project meets the requirements of either (a) a 20-50 test (20% of the residential units are both rent-restricted and occupied by individuals whose income is no more than 50% of the area median gross income (“AMI”); (b) a 40-60 test (40% or more of the residential units are both rent-restricted and occupied by individuals whose income is no more than 60% of the AMI); or (c) an “average income” test (40% or more of the residential units are both rent- restricted and occupied by individuals whose aggregate average imputed income is no more than 60% of the AMI and none more than 80% of the AMI). According to the Memo, the State Credit “will be used to serve households up to 80 percent [AMI] with an overall annual program targeting of 10% of funds used for households at 30% AMI.”
The Agency conditionally reserves tax credits “in a manner that the Agency…. reasonably believes will result in at least 10% of the tax credits being used to provide housing units targeting households with income at or below 30% of the area median income.” 72 P.S.§ 8903-G(E)(2). The Agency determines compliance with law and issues tax credit certificates (each a “Certificate”) not exceeding “20% of the conditional reservation for each taxable year in the tax credit period.” 72 P.S. § 8903-G(F). The taxpayer then presents the Certificate to the Department to claim a credit against the taxpayer’s Qualified Tax Liability, as defined below.
The extent of what constitutes “Qualified Tax Liability” makes the State Credit useful to a broad range of taxpayers. Qualified Tax Liability is “[t]he tax liability imposed on a taxpayer under Article III, IV, VII, IX or XV, including any tax withheld by an employer under Article III.” 72 P.S. §8902-G. Article III addresses personal income tax. Article IV addresses corporate net income tax. Article VII addresses bank and trust company shares tax. Article IX addresses insurance premiums tax. Article XV addresses mutual thrift institutions tax. These tax liabilities implicate a broad range of taxpayers. Accordingly, a “Taxpayer” is defined as “[a]n individual, business firm, corporation, business trust, limited liability company, partnership, limited liability partnership, association or any other form of legal business entity.” 72 P.S. § 8902-G.
The State Credit awarded to any taxpayer (each, an “Allocated Credit”) may be carried forward but not carried backward or refunded. “A taxpayer shall be entitled to carry forward a tax credit for a period not to exceed five taxable years from the taxable year in which the tax credit was awarded.” 72 P.S. § 8904-G(A). That Allocated Credit must be applied against the qualified tax liability in the tax year in which the Certificate was issued before it can be credited to any of the next 5 years. 72 P.S. § 8904-G(B). But the Allocated Credit may not be carried backward against a tax year prior to the year in which the Certificate issued nor may any unused portion of the Allocated Credit be refunded by the Commonwealth. 72 P.S. § 8904-G(C).
An Allocated Credit may be sold or assigned in whole or in part. 72 P.S. § 8906-G(A). This is important because the developer often obtains funding for the Project by assigning the Federal Credit to investors. Because the Allocated Credit may be carried forward for 5 years, it may be used by investors during the financing period for the Project. The use of the Federal Credit and the Allocated Credit create the same funding opportunities for developers but the Federal Credit is often claimed for ten years. Transfer of the Allocated Credit must be approved by the Department on a finding that the selling taxpayer “has filed all required state tax reports and returns for all applicable taxable years and paid any balance of state tax due as determined at settlement, assessment or determination by the Department.” 72 P.S. § 8906-G(B).
Special rules apply to sales or assignments by pass-through entities to members, shareholders or partners (each, an “Equity Holder). A “Pass-Through Entity” is either a partnership or Pennsylvania corporation, or an unincorporated entity with a single owner. 72 P.S.
§ 8902-G. Sales of all or a portion of an unused Allocated Credit may be transferred upon election in writing by the taxpayer according to procedures to be adopted by the Department “to [Equity Holders] in proportion to the share of the entity’s distributive income to which the [Equity Holder] is entitled.” 72 P.S. § 8907-G(A). An Equity Holder and the developer may not claim the Allocated Credit for the same Project. 72 P.S. § 8907-G(B). The member, shareholder or partner must “immediately claim the credit in the taxable year in which the transfer is made [and] … may not carry forward, carry back, obtain a refund of or sell or assign the tax credit.” 72 P.S. § 8907-G(C).
Purchasers and assignees other than Equity Holders (each a “Purchaser”) must immediately claim the Allocated Credit in the year of the transfer, subject to certain exceptions set forth in 72 P.S. § 8908-G. If the Allocated Credit is more than the Purchaser can use in that tax year, the excess may be carried forward and applied to qualified tax liabilities in succeeding years. The Allocated Credit carried forward must be reduced by the amount applied in the immediately preceding taxable year. The Purchaser may carry forward the Allocated Credit for the remainder of the 5-year credit period but may not carry it back or obtain a refund from the Department.
The Act provides for administrative rules for the Agency and the Department under 72 P.S. § 8909-G. The Agency allocates Federal Credit authorized by the IRC under a plan known as the “Qualified Allocation Plan.” The Agency must administer the State Credit in connection with the Qualified Allocation Plan using guidelines and procedures it develops (“Administrative Rules”). Those Administrative Rules must track, when possible, the guidelines, procedures and priorities the Agency uses to administer the Federal Credit. The Department must consult with the Agency to develop procedures for recapture of Allocated Credits during the 5-year credit period following the structure and effect of recapture rules set forth in section 42 of the IRC, 26 U.S.C.§ 42, with a mechanism and formula to recapture the Allocated Credit over the remaining term of the related credit period. Recapture is a remedy for fraud or intentional misrepresentation by a taxpayer to the Agency or Department regarding information required to be provided under the Act or the Agency’s Administrative Rules. Other penalties include deeming the applicant or taxpayer ineligible from future State Credits or as provided in the Administrative Rules. The Agency may charge a fee up to 5% of the Allocated Credit for administrative expenses.
The State Credits are not available, nor may a taxpayer apply therefor, until after the General Assembly enacts legislation providing for them and the Secretary of the Budget advertises a notice (the “Notice”) in The Pennsylvania Bulletin stating such. The Agency must report (each, a “Report”) on the State Credit by September 30th of the calendar year following publication of the Notice and by September 30th of each successive year. The Report must include: (1) the number and amount of Allocated Credits awarded in the prior fiscal year, (2) the taxpayers awarded those Allocated Credits, and (3) the amount of those Allocated Credits awarded to each taxpayer. The Report must be posted to the Agency’s publicly available website and given to the Majority Chair and the Minority Chair Appropriations Committees and Urban Affairs and Housing Committees of the House and Senate.
The Act also amends parts of Article XVIII(C) of the Code regarding City Revitalization and Improvement Zones to address issues related to COVID-19. 72 P.S. § 8809-C is amended to authorize certain state zone reports and local zone reports be filed by August 31, 2020 (instead of June 15th). 72 P.S. § 8013-G is amended to add (a) an authorization to use for grants and loans related to the Governor’s March 6, 2020 Disaster Emergency Proclamation some of the amount of certified eligible State zone tax funds transferred by the State Treasurer from the General Fund to contracting authorities and (b) for the return to the General Fund of such monies not utilized, budgeted or appropriated by official resolution of the contracting authority. The foregoing provisions are called the “Zone Amendments.”
Sen. Thomas H. Killion (R-9) sponsored SB 30 which became Act 107. Named co- sponsors include 18 other Senators, some of whom are no longer in office. SB 30 became Act 107 when approved by Governor Wolfe on November 3, 2020. The Zone Amendments apply retroactively to January 1, 2019, and the rest of the Act took effect immediately. The Act will help address the shortage of low-income rental housing in Pennsylvania by creating new residential units and according to the Memo, “incentivize financing to return blighted and abandoned homes to productive reuse.”