What is the Kansas Affordable Housing Tax Credit and how does it work?

Plain-English summary

Kansas Notice 23-08 explains the Kansas Affordable Housing Tax Credit Act, created by 2022 House Bill 2237 (Sections 1-6, now K.S.A. 2022 Supp. 79-32,304 through 79-32,309). It provides a state tax credit for a qualified low-income housing project.

Definitions (K.S.A. 79-32,305). Key terms track the federal program. A "federal tax credit" is the federal low-income housing tax credit under Section 42 of the Internal Revenue Code; a "qualified development" is a Section 42 "qualified low-income housing project" located in Kansas that KHRC (the Kansas Housing Resources Corporation) determines is eligible for a federal credit. A "qualified taxpayer" is an owner, direct or indirect, subject to Kansas income tax, the privilege taxes under article 11 of chapter 79, or the insurance premium taxes under K.S.A. 40-252.

The credit (K.S.A. 79-32,306). For tax years beginning after December 31, 2022, the credit may be claimed against (1) Kansas income tax, (2) the privilege tax on banks, trust companies, and savings and loan companies, or (3) the insurance premium tax. For each qualified development, for each year of the credit period, the credit equals the federal tax credit KHRC allocates or allows to that development. KHRC issues an allocation certificate at the same time as federal Form 8609, and all allocations follow the qualified allocation plan.

Pass-through entities (K.S.A. 79-32,306(d)). A pass-through entity that owns a qualified development may allocate the credit among its partners or members in any manner they agree, regardless of how federal credits are allocated. The credit can pass through any number of tiers without being treated as a transfer. (For related pass-through guidance, the notice points to Notice 22-16, SALT Parity Act.)

Carryforward (K.S.A. 79-32,306(g)). Credit exceeding the taxpayer's liability carries forward up to 11 tax years, applied to the earliest years first. It is not refundable.

Eligibility and recapture (K.S.A. 79-32,306(h) and 79-32,307). KHRC determines eligibility and allocates credits under Section 42, keeping the combination of federal and state credits to the least amount needed for the development's financial feasibility. If federal credits on the development are recaptured or disallowed, the same percentage of the Kansas credit is recaptured, increasing the taxpayer's liability for the year the recapture event is identified.

What this means for you

Developers and owners of low-income housing

• If your Kansas project qualifies for the federal Section 42 credit, you can also earn a matching Kansas credit equal to the federal amount KHRC allocates, for each year of the credit period.
• The credit offsets Kansas income tax, bank privilege tax, or insurance premium tax, and unused amounts carry forward up to 11 years.
• Watch the recapture rule: if your federal credit is recaptured or disallowed, the same share of your Kansas credit is clawed back.

Investors in pass-through entities

• A partnership or LLC that owns the development can allocate the Kansas credit among its owners in any agreed manner, independent of the federal allocation, through any number of tiers.

Tax professionals

• File the KHRC allocation certificate (and any pass-through certification) with the state income, privilege, or premium tax return. The first-year credit is not reduced by the Section 42(f)(2) calculation.

Common questions

How big is the credit? For each qualified development, it equals the federal low-income housing tax credit that KHRC allocates or allows for that development, for each year of the credit period.

Against what taxes? Kansas income tax, the bank privilege tax, or the insurance premium tax.

When does it start? Tax years beginning after December 31, 2022.

Can unused credit carry forward? Yes, up to 11 tax years; it is not refundable.

What triggers recapture? If federal credits on the development are recaptured or disallowed, the same percentage of the Kansas credit is recaptured.

Citations and references

• House Bill 2237 (2022), Sections 1-6 -- created the Kansas Affordable Housing Tax Credit Act.
• K.S.A. 79-32,305 -- definitions, tied to Section 42 of the Internal Revenue Code.
• K.S.A. 79-32,306 -- creates the credit, allows pass-through allocation, and provides an 11-year carryforward.
• K.S.A. 79-32,307 -- recapture when federal credits are recaptured or disallowed.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 23-08

Original ruling text

Policy and Research
109 SW 9th Street Phone: 785-368-8222
PO Box 3506 Fax: 785-296-1279
Topeka KS 66601-3506 www.ksrevenue.gov
Mark A. Burghart, Secretary Laura Kelly, Governor

                                        NOTICE 23-08

                 KANSAS AFFORDABLE HOUSING TAX CREDIT ACT

                                    (SEPTEMBER 6, 2023)

  During the 2022 Legislative Session House Bill 2237 was passed and signed into law. New

Sections 1 – 6 of the Bill, now K.S.A. 2022 Supp. 79-32,304 through 79-32,309, create the Kansas
Affordable Housing Tax Credit Act. The act provides a tax credit for a qualified low-income
housing project.

Definitions

  K.S.A. 2022 Supp. 79-32,305 defines several terms. Specifically, K.S.A. 2022 Supp. 79-

32,305(c) through (l) includes these definitions:

          (c) "credit" means the Kansas affordable housing tax credit allowed pursuant to this
   act;
         (d) "credit period" means the credit period as defined in section 42(f)(1) of the federal
   internal revenue code;
         (e) "director" means the director of taxation pursuant to K.S.A. 75-5102, and
   amendments thereto;
         (f) "federal tax credit" means the federal low-income housing tax credit provided by
   section 42 of the federal internal revenue code;
         (g) "KHRC" means the Kansas housing resources corporation, a not-for-profit
   subsidiary of the Kansas development finance authority incorporated pursuant to K.S.A. 74-
   8904(v), and amendments thereto;
         (h) "pass-through entity" means any: (1) Limited liability company; (2) limited
   partnership; or (3) limited liability partnership;
         (i) "pass-through certification" means a certification provided to the director by any
   pass-through entity allocating a credit to its partners or members, certifying the amount of
   credit to be allocated to each partner or member of such pass-through entity;
         (j) "qualified allocation plan" means the qualified allocation plan adopted by the
   KHRC pursuant to section 42(m) of the federal internal revenue code;
         (k) "qualified development" means a "qualified low-income housing project," as that
   term is defined in section 42 of the federal internal revenue code that is located in Kansas
   and is determined by the KHRC to be eligible for a federal tax credit whether or not a federal
   tax credit is allocated with respect to such qualified development; and
         (l) "qualified taxpayer" means an individual, a person, firm, corporation, or other
   entity that owns an interest, direct or indirect, in a qualified development and is subject to
   the taxes imposed by the Kansas income tax act, the privilege taxes imposed pursuant to
   article 11 of chapter 79 of the Kansas Statutes Annotated, and amendments thereto, or the
   premium taxes imposed pursuant to K.S.A. 40-252, and amendments thereto.

Tax Credit

 K.S.A. 2022 Supp. 79-32,306 creates, for all taxable years commencing after December 31,

2022, a tax credit to be claimed against: (1) Kansas income tax; (2) the privilege tax liability
imposed upon any national banking association, state bank, trust company, or savings and loan
company; or (3) the premium tax liability imposed upon an insurance company.

  The tax credit will be for each qualified development for each year of the credit period, in an

amount equal to the federal tax credit allocated or allowed by the Kansas Housing Resources
Corporation to such qualified development. The bill does not allow a reduction in the credit
allowable in the first year of the credit period due to the calculation in Section 42(f)(2) of the
Internal Revenue Code.

  The Kansas Housing Resources Corporation will be required to issue an allocation certificate

to an owner of a qualified development receiving a credit under the Affordable Housing Tax Credit
Act, to be issued simultaneously with issuance of federal form 8609, related to federal tax credits.

 The bill requires all allocations to be made pursuant to the qualified allocation plan.

Pass-through Entities

  K.S.A. 2022 Supp. 79-32,306(d) allows pass-through entities that are owners of a qualified

development and receiving a tax credit under the Affordable Housing Tax Credit Act to allocate
the credit among its partners or members in any manner agreed upon, regardless of whether:

 ●     Any such person is allocated or allowed any portion of any federal tax credit with
       respect to the qualified project;

 ●     Allocation of the credit under the terms of the agreement has substantial economic
       effect within the meaning of Section 704(b) of the federal Internal Revenue Code; or

 ●     Any such person is deemed a partner for federal income tax purposes, if the partner or
       member would be considered a partner or member under applicable state law governing
       such entity and has been admitted as a partner or member on or prior to the date for
       filing the qualified taxpayer's tax return, including any amendments to such tax return,
       with respect to the year of the credit.

 The tax credit may be allocated through any number of pass-through tiers and entities, none

of which would be considered a transfer.

  Any pass-through entity allocating a credit to its partners or members is required to attach a

pass-through certification to its annual tax return. Each partner or member is allowed to claim or
further allocate such amount pursuant to any restrictions in the Affordable Housing Tax Credit
Act.

  Each qualified development owner and qualified taxpayer receiving a tax credit or portion of

such credit will be required to file with their state income, privilege, or premium tax return a copy
of the allocation certificate issued by Kansas Housing Resources Corporation and a copy of any
pass-through certification as prescribed by the Director of Taxation.

   For additional information regarding pass-through entities, see Notice 22-16 SALT Parity

Act.

Credits Carried Forward

  K.S.A. 2022 Supp. 79-32,306(g) allows any credit amount in excess of the qualified

taxpayer's tax liability to be carried forward as a credit against their subsequent year tax liability
for up to 11 tax years following the tax year in which the allocation was made. The tax credit is
applied first to the earliest years possible. Any unused tax credit amount will not be refunded to
the taxpayer.

Eligibility Determination

   K.S.A. 2022 Supp. 79-32,306(h) requires the KHRC to determine eligibility for a tax credit,

and to allocate credits in accordance with Section 42 of the federal Internal Revenue Code. The
bill requires any combination of federal tax credits and Affordable Housing Tax Credit Act tax
credits to be the least amount necessary to ensure the qualified development's financial feasibility.

Credits Subject to Recapture

  K.S.A. 2022 Supp. 79-32,307 requires the recapture of a portion of any credits authorized

under the Affordable Housing Tax Credit Act if a portion of any federal tax credits taken on a
qualified development is recaptured or otherwise disallowed. The percentage of Affordable
Housing Tax Credit Act credits to be recaptured will be equal to the percentage of federal credits
subject to recapture or otherwise disallowed.

 The recapture or disallowance of credits will increase the tax liability of the qualified

taxpayer who claimed the credits and shall be included on the tax return of the qualified taxpayer
submitted for the taxable year in which the recapture or disallowance event is identified.

                               TAXPAYER ASSISTANCE

 Additional copies of this notice, forms or publications are available from our web site,

www.ksrevenue.gov. If you have questions about this Notice, please contact:

                            Taxpayer Assistance Center
                           Kansas Department of Revenue
                           Scott Office Building, 1st Floor
                                  120 SE 10th Ave
                                   P. O. Box 3506
                              Topeka, KS 66601-3506
                                Phone: 785-368-8222
                                 Fax: 785-291-3614