Tax Credits = Cash: A simple concept with Huge Benefits
(Admin note: Mountain Plains Equity Group recently exhibited at our Spring Coal Forum in Tampa, FL. This company had an innovative means of showing the energy industry how they can play a role in the development and betterment of the communities in which they operate, while also enjoying tax breaks on the money they invest in those communities. We thought our member companies and the readers of the Coalblog would find their suggestions interesting.)
Main Benefits to Interested Parties:
- Investors receive tax credits and other tax benefits, an attractive ROI and good Public Relations
- Developers of the project receive the equity capital they need to construct the property
- Residents receive a quality place to live – at a price they can afford
- The community enjoys a valuable asset that raises the quality of life and promotes sustainable economic growth
By Don Sterhan, Mountain Plains Equity Group
In today’s economic climate, many companies are re-examining their investment strategies and exploring new ways to improve the bottom line. One way to realize better results is to consider proven tax measures and tax mitigation strategies to hold on to more of your earnings.
It is a simple and basic concept … every dollar you save in taxes equals another dollar of cash on hand. Or as Ben Franklin would say, “A penny saved is a penny earned.” So why not take advantage of this same concept in managing your company’s financial affairs?
Investing in tax credits is an effective way for companies to receive a dollar-for-dollar reduction of their federal tax liability. These tax credits are typically purchased at a discount, so the investor actually receives an attractive “return on investment” as the tax savings are realized.
One such tax credit program to consider is the Low-Income Housing Tax Credit (LIHTC), more specifically defined as Section 42 of the Internal Revenue Code. This federal tax credit program provides economic incentives to promote and preserve affordable housing for low-income families. The program was established through the passage of the Tax Reform Act of 1986; since that time, literally billions of dollars of equity investment capital has been invested in low-income housing projects across the country.1
Traditionally, the main investors in this tax credit program have been banks and financial institutions (e.g., Fannie Mae, Freddie Mac, Bank of America, Citibank, Wells Fargo, JP Morgan Chase, US Bank, AIG, AEGON Insurance, American Express). However, other savvy corporate investors have also been participating in the program for some time, including Berkshire Hathaway, Cargill, Verizon, and a host of utility/energy companies.
LIHTC investments are generally organized as a Limited Partnership or LLC. The investor contributes equity capital and becomes a limited partner or member of the entity. The equity dollars are then invested directly into the housing project(s) and the resulting tax credits flow back to the investor. In addition to the tax credits, this pass-through entity also allows the property to deliver its operating losses to the investor (losses generated primarily from depreciation, amortization and interest expenses related to the property). The tax credits are earned over a period of ten consecutive years, whereas the operating losses are realized over the full 15-year term of the partnership. Coupled together, these tax benefits represent the economic rate of return to the investor.
Of course, the value of these tax benefits (and the commensurate return) is heavily influenced by the discounted price of the tax credit itself. Subject to the laws of supply and demand, as well as other market factors, the price of tax credits will fluctuate somewhat from one year to the next. That being said, in today’s marketplace, LIHTC investments are producing attractive yields for investors. Assuming a 35% tax bracket, LIHTC investors in early 2010 can expect to realize an annualized after-tax internal rate of return of between 10% and 11%.
Perhaps the easiest way for an investor to participate in the LIHTC program is to work through a financing company that specializes in such transactions. Known in the industry as a “syndicator”, Mountain Plains Equity Group, Inc. (MPEG) is just such a company. On behalf of investors, our company works to identify, evaluate and facilitate suitable LIHTC investments. This relationship allows an investor to access to the program (and the marketplace) with an experienced and professional partner. As the saying goes, “We sweat the details … so you don’t have to!”
In the final analysis, housing tax credits are a proven strategy to help mitigate your tax liability and improve your bottom line. If you owe taxes, the LIHTC program is a viable and practical consideration for your company. Instead of sending that check to Uncle Sam every quarter (at 0% return of investment), why not dedicate that same pot of money to a LIHTC investment? By doing so, your company will realize a tangible ROI, not to mention the benefit and goodwill to be earned by providing affordable housing to communities in need.
Don Sterhan is President & CEO of Mountain Plains Equity Group, Inc. in Billings, MT. To learn more about the LIHTC program or the investment options available, contact Don at (406) 254-1677 or check out the website: www.mpequity.com
1: Regulatory changes provided in the Housing & Economic Recovery Act of 2008 now permit the use of this tax credit to offset AMT liabilities. (return to article)