C.3 Scope of QAHP Guidance
ASC 323-740
05-2 The
Qualified Affordable Housing Project Investments Subsections
provide income tax accounting guidance on a specific type of
investment in real estate. This guidance applies to
investments in limited liability entities that manage or
invest in qualified affordable housing projects and are
flow-through entities for tax purposes.
15-3 The
guidance in the Qualified Affordable Housing Project
Investments Subsections applies to reporting entities that
are investors in qualified affordable housing projects
through limited liability entities that are flow-through
entities for tax purposes.
25-1 A
reporting entity that invests in qualified affordable
housing projects through limited liability entities (that
is, the investor) may elect to account for those investments
using the proportional amortization method (described in
paragraphs 323-740-35-2 and 323-740-45-2) provided all of
the following conditions are met:
a. It is probable that the tax credits allocable to
the investor will be available.
aa. The investor does not have the ability to
exercise significant influence over the operating
and financial policies of the limited liability
entity.
aaa. Substantially all of the projected benefits
are from tax credits and other tax benefits (for
example, tax benefits generated from the operating
losses of the investment).
b. The investor’s projected yield based solely on
the cash flows from the tax credits and other tax
benefits is positive.
c. The investor is a limited liability investor in
the limited liability entity for both legal and tax
purposes, and the investor’s liability is limited to
its capital investment.
25-1A In
determining whether an investor has the ability to exercise
significant influence over the operating and financial
policies of the limited liability entity, a reporting entity
shall consider the indicators of significant influence in
paragraphs 323-10-15-6 through 15-7.
25-1B Other
transactions between the investor and the limited liability
entity (for example, bank loans) shall not be considered
when determining whether the conditions in paragraph
323-740-25-1 are met, provided that all three of the
following conditions are met:
- The reporting entity is in the business of entering into those other transactions (for example, a financial institution that regularly extends loans to other projects).
- The terms of those other transactions are consistent with the terms of arm’s-length transactions.
- The reporting entity does not acquire the ability to exercise significant influence over the operating and financial policies of the limited liability entity as a result of those other transactions.
ASC 323-740 permits entities to elect, as an accounting policy, to account for QAHP
investments that meet certain criteria by using the proportional amortization
method.4 Such method, however, applies only to investments in QAHPs through limited
liability entities and should not be analogized to investments in other projects for
which substantially all of the benefits come from tax credits and other tax
benefits. This restriction is similar to the SEC staff’s view described in ASC
323-740-S99-2 that it would be inappropriate to extend the prior effective-yield
method of accounting to analogous situations (i.e., investments involving other
types of tax credits).
Before applying the guidance in ASC 323-740, a reporting entity must
first consider whether it is required under ASC 810 to consolidate a QAHP investee.
If consolidation of the QAHP investee is required, the proportional amortization
method cannot be used.
If the QAHP investee is not consolidated, ASC 323-740-25-1 permits the
investor(s) to elect to use the proportional amortization method as long as
all of the following five criteria are met:
-
“It is probable that the tax credits allocable to the investor will be available” (see Section C.3.1).
-
“The investor does not have . . . significant influence over [the QAHP]” (see Section C.3.2).
-
“Substantially all of the projected benefits are from tax credits and other tax benefits” (see Section C.3.3).
-
“The investor’s projected yield based solely on . . . income tax benefits is positive” (see Section C.3.4).
-
“The investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment” (see Section C.3.5).
C.3.1 Availability of LIHTC Tax Credits
Under the first scope criterion that must be met for an investor
to elect to use the proportional amortization method, it must be probable that
the tax credits allocable to the investor will be available. The ASC master
glossary defines probable as “[t]he future event or events are likely to occur.”
If an investor has previously established an accounting policy to define
probable for use in the application of other U.S. GAAP, it should use that same
policy when evaluating this scope condition.
Since LIHTCs are earned over a 10-year period, an investor should assess whether
it can reasonably expect LIHTCs generated over the life of the investee to be
available for distribution to the investor.
C.3.2 Significant Influence
Under the second scope criterion that must be met before an
investor can elect to use the proportional amortization method, the investor
cannot have the ability to exercise significant influence over the investee’s
operating and financial policies.
In the application of the guidance on equity method investments,
an investor with an ownership in a QAHP entity is generally presumed to have
significant influence on the basis of its level of ownership (see Section 3.2); however, ASC 323-740-25-1A
excludes reference to any ownership thresholds. As noted in paragraph BC12 of
ASU 2014-01, the EITF’s intent in reaching the conclusions in the ASU was “to
identify those investments that are made for the primary purpose of receiving
tax credits and other tax benefits” and to allow an investor to elect the
proportional amortization method to account for such investments. Further, the
EITF believed that “an investor who has the ability to influence the operating
and financial policies of the [QAHP] entity should not be precluded from
[electing the proportional amortization method] as long as that investor does
not have the ability to exercise significant influence.” In accordance with its
objective, the EITF concluded that the presumption that an investor can exercise
significant influence at 20 percent or more voting stock ownership would not
apply to investments in QAHP entities since that presumption “was intended for
application to investments in common stock and not to investments in limited
liability partnership interests.” Although the EITF did not indicate that the
quantitative thresholds typically associated with an investor’s possessing
significant influence over a partnership would not apply to an investment in a
QAHP entity, it is reasonable to conclude, on the basis of the EITF’s stated
objective, that an investor in a QAHP entity would not be required to consider
the guidance in ASC 323-30 that a 3 percent to 5 percent ownership interest in a
partnership constitutes significant influence over the partnership. Rather, the
qualitative indicators included in ASC 323-10-15-6 and 15-7 should be considered
to determine whether an investor has significant influence.
As a result, an investor that holds the majority of limited
partnership interests (e.g., 99 percent of the limited partnership units) in a
QAHP may be able to conclude that it does not have the ability to exercise
significant influence over the QAHP’s operating and financial policies. However,
if the investor concludes that it participates in the QAHP’s policy-making
processes, it would be deemed to have significant influence and would not be
eligible to apply the proportional amortization method to account for its
investment in the QAHP entity. In addition to the indicators of significant
influence discussed in Section 3.3,
factors to consider in the determination of whether an investor participates in
the policy-making processes of a QAHP entity include the following:
-
Does the investor have the ability to make decisions about the day-to-day operations of the QAHP entity (e.g., accepting tenants, setting rent)?
-
Does the investor have the ability to vote on operating and capital budgets or otherwise participate in making decisions about the day-to-day operations of the QAHP?
The existence of protective rights (e.g., the ability to remove the GP with cause
or to veto the sale of a property owned by the QAHP entity for significantly
less than its fair value) would generally not provide the investor with
significant influence over the QAHP entity.
C.3.3 Substantially All of the Projected Benefits
Under the third scope criterion that must be met for an investor
to elect to use the proportional amortization method, substantially all of the
projected benefits of the investment must be derived from tax credits and other
tax benefits, such as operating losses. An investor should evaluate this scope
condition on the basis of a ratio in which (1) the numerator includes only the
income tax credits and other income tax benefits (net of income tax expense, if
any) expected to be realized from the investment and (2) the denominator
includes all benefits expected to be realized from the investment.
If an investment is expected to generate income tax expenses along with income
tax benefits, such as income tax expense generated from an investee’s taxable
income, the net amount of income tax benefits would be used in this calculation
to determine whether this criterion is met.
While the term “substantially all” is not defined in the Codification, we believe
that a threshold of 90 percent should generally be used to determine whether the
tax credits and tax benefits generated by an investee meet the substantially all
threshold. However, if an investor has previously established an accounting
policy to quantify substantially all (such as a policy established during the
implementation of ASC 842 to evaluate lease classification), that existing
policy should continue to be used.
C.3.4 Positive Projected Yield
Under the fourth scope criterion that must be met for an
investor to elect to use the proportional amortization method, the investor’s
projected yield, calculated solely on the basis of the cash flows from the tax
credits and other net tax benefits, must be positive. When evaluating this
criterion, an investor should consider the tax credits as well as other net tax
benefits expected to be realized from the investment, such as net operating
losses. See Section
C.4.1 for additional factors to consider for QAHP investments
that generate other tax credits in addition to LIHTCs.
C.3.5 Form of the Investment
Under the fifth and final scope criterion that must be met for
an investor to elect to use the proportional amortization method, the investor
must be a limited liability investor in a limited liability entity for both
legal and tax purposes, and the investor’s liability must be limited to its
capital investment. In practice, investments made through both partnership and
LLC structures meet this scope requirement.
Footnotes
4
An entity that used the effective yield method to account for its QAHP
investments before adopting ASU 2014-01 may continue to apply that method
for those prior investments