LIHTCs follow a multistep process that begins with the allocation of tax credits to HFAs. The process of allocating, awarding, and using LIHTCs is depicted in figure 1. As the figure shows, there are four primary steps in the LIHTC process. 1. HFAs receive tax credit allocations. State ceilings for LIHTCs are allocated by statutory formula to states annually according to population, with a minimum amount awarded to states with small populations. For 2012, the formula was $2.20 per capita or a minimum of $2,525,000. 2. Developers apply to the states for tax credits. To apply for tax credits, a developer must submit a detailed proposal to an HFA. To qualify for consideration, a project must meet certain requirements, such as reserving specified percentages of available units for lower income households and restricting rents for these households to 30 percent of a calculated income limit. 3. HFAs award tax credits to selected housing projects. The potential to earn tax credits is competitively awarded to housing projects in accordance with states’ QAPs. QAPs outline a state’s affordable housing priorities and set out its procedure for ranking the projects on the basis of how well they meet state priorities and selection criteria that are appropriate to local conditions. The QAP must give preference to projects that serve the tenants with the lowest incomes, serve qualifying tenants for the longest period of time, and are located in a qualified census tract (QCT) and contribute to a local community revitalization plan. Developers receiving tax credit allocations have 2 years to complete their projects and may not claim the credits until the projects are placed in service. 4. Investors receive tax benefits. Investment partnerships are a primary source of equity financing for LIHTC projects. Syndicators recruit investors willing to become partners in LIHTC partnerships. The money investors pay for the partnership interest is paid into the LIHTC project as equity financing. Although investors are buying an interest in a rental housing partnership, this process is commonly referred to as buying tax credits because they receive tax credits in return for their investment. Once the LIHTC project is placed in service, or ready for occupancy, investors can receive their share of the credits each year of the 10-year credit period and can use the credit to offset federal income taxes otherwise owed on their tax returns, as long as the project meets the LIHTC requirements. The amount of tax credits a project can receive depends on several factors, including the applicable fraction and the applicable percentage (see table 1). The applicable fraction, or the percentage of units in the building considered to be qualified low-income units, is the lesser of (1) the total square feet of the low-income units divided by the total square feet of all the units, or (2) the number of the low-income units divided by the total number of units. Regarding the applicable percentage, there are two credit rates (referred to as the 9 percent and 4 percent rates) for the LIHTC program that determine how much of a project’s costs the allocated credits can cover. The credit rate takes into account whether the project is newly constructed or acquired and rehabilitated and the extent to which it uses other federal subsidies. Most new construction and substantial rehabilitation projects are eligible for the 9 percent rate, which allows investors to claim credits for about 9 percent of the eligible basis annually over a 10-year period.the 9 percent credit floated based on a statutory formula and often fell below 9 percent. Because the LIHTC program is jointly administered by federal and state governments, agencies at both levels played roles in implementing HERA’s changes to the program. At the federal level, IRS and Treasury’s Office of Tax Policy provided new guidance for program stakeholders. At the state level, HFAs modified their QAPs for allocating tax credits. HERA made changes to the LIHTC program that affected various parties, including taxpayers, HFAs, and project owners, and IRS and Treasury provided guidance and took other actions into 2012 to implement these changes. To better ensure that information on the HERA changes was widely accessible, IRS issued revenue procedures and notices, made changes to forms and form instructions, and circulated newsletters to program stakeholders. More specifically, its actions included the following: Issuing (1) a revenue procedure for taxpayers to follow when choosing to no longer maintain a surety bond, as permitted by the HERA change described in table 2, item 6; (2) a notice that the 9 percent floor (table 2, item 2) would apply to eligible projects that had committed to a lower rate before HERA; and (3) a newsletter to program stakeholders describing new income limits related to the HERA “hold harmless” provisions described in table 2, item 9. The income limits are a percentage of the relevant area’s median gross income and are the basis for calculating the gross rent that a LIHTC project can charge. Updating instructions for Form 8609, “Low-Income Housing Credit Allocation and Certification,” to reflect changes involving the 9 percent floor (table 2, item 2), federally subsidized buildings (table 2, item 4), and the HERA basis boost (table 2, item 3). HFAs use the form to report LIHTC allocations for buildings to IRS, and building owners use it to certify such things as a building’s eligible basis, qualified basis, and placed-in-service date. Revising the Guide for Completing Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition, a guide intended to help housing agencies identify and consistently report noncompliance issues to IRS. Discussing through internal memorandums whether regulations needed to be updated because of HERA and exploring implementation issues that surfaced. For instance, IRS internally considered questions from the division tracking its own implementation of HERA’s LIHTC provisions about whether the changes required updates to regulations governing general public use requirements mentioned in table 2, item 8. An official from IRS’s Office of Chief Counsel told us they determined that no updates were needed. Program stakeholders we spoke with, including HFAs, industry associations, syndicators, and developers, generally said that IRS’s actions to implement the HERA changes were sufficient, and that they were satisfied with the agency’s efforts. However, they raised two concerns in our discussions that IRS and Treasury have continued to consider and act on. The first involved the HERA provision noted in table 2, item 5, that eased restrictions on using LIHTCs to acquire an existing building. Before HERA, acquisition costs for an existing building generally would not be eligible for LIHTCs unless the building had been placed in service 10 years or more before it was acquired. HERA waived this 10-year rule for any federally or state-assisted building—that is, any building that was “substantially” assisted, financed, or operated under certain federal or state programs or laws. In response to this HERA provision, the IRS Chief Counsel and Treasury placed clarification of the meaning of “substantially” on priority lists of guidance projects for July 2010 through June 2011 and July 2011 through June 2012. With over 300 guidance projects on the priority list for 2011- 2012, IRS and Treasury had not issued any guidance defining “substantially” as of October 2012. Agency officials cited the complexity of the issue and other agency priorities as reasons for the delay.Treasury official was not yet able to tell us when the agency would complete the guidance, what it was likely to say, or whether it would resolve the definition of “substantially” for both federal and state subsidies at the same time. The relative importance of future guidance is unclear as stakeholders disagreed on the need to clarify the meaning of “substantially.” Some stakeholders said there was little need for clarification. However, one organization sought guidance from Treasury in 2009 and 2010 because, it said, the lack of a definition was delaying some acquisition projects. An IRS official agreed, saying the lack of guidance had delayed acquisition projects and resulted in the substitutions of other projects, such as construction of new buildings, for acquisitions. In addition, a Treasury official told us that the lack of guidance had likely made attorneys for potential LIHTC projects conservative in interpreting “substantially.” For example, some may have decided that all the units in a building must be federally subsidized in order to meet the definition. A second concern—related to HERA’s hold harmless provisions on income and rent limits—did not rise to the level of necessarily requiring formal guidance, but has received continued federal attention because of its complicated nature. The hold harmless provisions (table 2, item 9) are aimed at bolstering the financial viability of LIHTC projects by preventing rents from automatically falling when area income levels, on which the rents are based, decline. In so doing, the provisions resulted in a system in which, for instance, three projects on the same street could have three different sets of income and rent limits if they were placed in service in three different time periods. Accommodating all of the possibilities for different placed-in-service dates required projects to use multiple tables to find the applicable income and rent limits, and some program participants have found this confusing. Furthermore, the income and rent limits change annually when HUD publishes new area income levels. The owner of a LIHTC project must use the correct table, based on the building’s location and placed-in-service date, to determine the maximum income that a household may have to be a qualified low-income household, and the maximum gross rent that a household may be charged, based on the number of bedrooms in the unit, for the unit to qualify for the credit as a low-income unit.