Frequently asked Questions

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 Which Tax Credit Program is Right for my Company?

It depends on your corporate objectives and goals. The most widely used tax credit is Section 42 (Affordable Housing) as it provides several structural opportunities that the other tax credits cannot match. Section 42 is also a long-term credit program, which enables corporations to do long term planning. The key, however, is to talk to us about your needs and let us create a program which can enhance your shareholder value through utilization of tax credits.

 

What are Tax Credits?

Tax Credits, while they come in many forms, are authorized incentives under the Internal Revenue Code (and some state tax codes) to implement public policy. Congress, in an effort to encourage the private sector to provide a public benefit, allows a participating taxpayer a dollar for dollar reduction of their tax liability for investments in projects thatprobably would not occur but for the credits.

Foss and Company focuses on three types of Credits:

Affordable Housing Credits

Historic Rehabilitation Credits

Alternative Energy Credits

Tax Credits and tax deductions combined have the synergistic benefit of a bottom-line reduction of Federal taxes. Moreover, these investments can be structured in a way that results in their being funded with tax dollars instead of corporate cash.

 

What are the Benefits?

Reduce Taxes – tax credits are a dollar for dollar reduction of a corporations tax liability. They are a permanent benefit!

Increase Cash – tax credits and the related benefits increase corporate cash and positively impact EPS.

Increased Book Value – as taxes are reduced and earnings increase the corporation’s book value increases.

Social Benefit – many corporations appreciate the social benefit provided by the development of affordable housing, the rehabilitation of a historic building or development of an alternative source of energy. Corporations find they can do good while doing well.

Banks understand that certain tax credit investments help them satisfy Community Reinvestment Act (CRA) obligations.

 

How many types of Credits are Available?

While there are numerous tax credit programs, all are designed to promote a social benefit. Foss and Company focuses exclusively on three credit programs which generate the most substantial benefit for our institutional client.

Section 42, Affordable Housing Tax Credits which are a permanent part of the tax code

Section 47, Historic Tax Credits which are also a permanent part of the tax code.

 

What are the Risks?

Section 42 Tax Credits

The risks associated with an investment in an affordable housing tax credit property can be summarized in the following broad categories:

Real Estate Risk

The affordable housing tax credit is generated when qualified apartments are built or renovated and then rented to individuals or families whose income is less than the area median. As such, there are risks associated with real estate construction and rent-op. However, the highly regulated and competitive nature of the affordable housing program lessens most of the common risks. The result has been a foreclosure rate of less than 1 since inception of the program in 1985.

Asset Management

After the property is built or renovated it must be leased to qualified tenants. This process of maintaining a qualified tenant base requires knowledge of the complex regulations and the skill to implement them. It is important to have competent asset managers with proven track records to assume the initial and ongoing success of your property.

Compliance

The affordable housing industry is highly regulated by Federal, State and Local Legislation. In order to maintain the tax credits awarded to a specific property, the property must stay in constant compliance with the regulations. Quality experienced property managers are a must for this purpose.

Tax

The chief benefits for corporate investors derived from the affordable housing tax credit programs are generated by the tax credits. While the credits were initially a pilot program, it has become a permanent part of the tax code and enjoys significant bipartisan support in Congress.

Investor Profitability

Since one of the key components of the program is the tax credits – the ability to use those credits by the corporate investor is important. The credits can be carried back one year and forward 15 years. Therefore, we generally recommend that the corporate investor have some degree of assurance that it will have a tax liability above the alternative minimum tax for seven of the next ten years. If there is a corporate surprise resulting in a loss of appetite credits, there is an active secondary market.

 

Are Other Companies Participating?

Yes – The list of corporate investor participant’s reads like a “who’s who” of corporate America. The affordable housing program provides investors with a predictable and consistent stream of benefits which are determined before the investment is made. Consequently consistently profitable tax paying corporations (who are not in AMT) are the investors.

Financial institutions

Insurance companies

Manufacturing

Retail

Public utilities

Homebuilders

Others are represented.

Many companies have made investments in affordable housing of over $500 million and several now exceed $1 billion.

 

Copyright © Foss & Co 2017

1700 Montgomery, Ste 210
San Francisco, CA 94111

Phone: (415) 292-9800

Fax: (415) 292-2358 

Securities offered through FINANCIAL WEST GROUP,  Member FINRA/SIPC.  Foss and Company is not affiliated with Financial West Group nor is it a broker dealer.‚Äč