[Federal Register Volume 90, Number 187 (Tuesday, September 30, 2025)]
[Rules and Regulations]
[Pages 46756-46762]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-19005]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10036]
RIN 1545-BQ47
Section 42, Low-Income Housing Credit Average Income Test
Procedures
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations setting forth
recordkeeping and reporting requirements for the average income test
for purposes of the low-income housing credit. If a building is part of
a residential rental project that satisfies the average income test,
the building may be eligible to earn low-income housing credits. These
final regulations affect owners of low-income housing projects, State
or local housing credit agencies that monitor compliance with the
requirements for low-income housing credits, and, indirectly, tenants
in low-income housing projects.
DATES:
Effective date: These regulations are effective on September 30,
2025.
Applicability date: For dates of applicability, see Sec. 1.42-
19(f).
FOR FURTHER INFORMATION CONTACT: Waheed Olayan at (202) 317-4137 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 42 of the Internal Revenue Code (Code)
relating to recordkeeping and reporting requirements for the average
income test for purposes of the low-income housing credit (final
regulations). The final regulations are issued under the authority
granted to the Secretary of the Treasury or the Secretary's delegate
(Secretary) in sections 42(n) and 7805(a) of the Code.
Section 42(n) provides, in part, ``The Secretary shall prescribe
such regulations as may be necessary or appropriate to carry out the
purposes of [section 42] . . .''
Section 7805(a) provides, ``[T]he Secretary shall prescribe all
needful rules and regulations for the enforcement of [the Code],
including all rules and regulations as may be necessary by reason of
any alteration of law in relation to internal revenue.''
Background
The Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085 (1986
Act) created the low-income housing credit under section 42. Section
42(a) provides that the amount of the low-income housing credit for any
taxable year in the credit period is an amount equal to the applicable
percentage (effectively, a credit rate) of the qualified basis of each
qualified low-income building.
Section 42(c)(1)(A) provides that the ``qualified basis'' of any
qualified low-income building for any taxable year is an amount equal
to: (i) the applicable fraction, determined as of the close of the
taxable year, multiplied by (ii) the eligible basis of the building
(determined under section 42(d)).
Section 42(c)(1)(B) defines the term ``applicable fraction'' as the
smaller of the unit fraction or floor space fraction. The unit fraction
is the number of low-income units in the building divided by the number
of residential rental units (whether or not occupied) in the building.
The floor space fraction is the total floor space of low-income units
in the building divided by the total floor space of residential rental
units (whether or not occupied) in the building.
Subject to certain exceptions in section 42(i)(3)(B), section
42(i)(3) defines the term ``low-income unit'' as any unit in a building
if the unit is rent-restricted and the individuals occupying the unit
meet the income limitation under section 42(g)(1) that applies to the
project of which the building is a part.
Section 42(d)(1) and (2) describe how to calculate the eligible
basis of a new building or an existing building, respectively.
Section 42(c)(2) defines the term ``qualified low-income building''
as any building which is part of a qualified low-income housing project
at all times during the compliance period (as defined in section
42(i)(1), the period of 15 taxable years beginning with the first
taxable year of the credit period).
For a project to qualify as a low-income housing project, it must
satisfy one of the section 42(g) minimum set-aside tests, as elected by
the taxpayer. Prior to the enactment of the Consolidated Appropriations
Act of 2018, Public Law 115-141, 132 Stat. 348 (2018 Act), section
42(g) contained two minimum set-aside tests, known as the 20-50 test
and the 40-60 test. Under the 20-50 test, an electing taxpayer cannot
earn any low-income housing credits unless at least 20 percent of the
residential units in the project both are rent-restricted and are
occupied by tenants whose gross income is 50 percent or less of the
area median gross income (AMGI). Under the 40-60 test, an electing
taxpayer cannot earn any low-income housing credits unless at least 40
percent of the residential units in the project both are rent-
restricted and are occupied by tenants whose gross income is 60 percent
or less of AMGI.
The 2018 Act added section 42(g)(1)(C), which gives taxpayers a
third option for their election of a minimum set-aside test--the
average income test. Under the average income test, an electing
taxpayer cannot earn any low-income housing credits unless--(i) 40
percent \1\ or more of the residential units in the project both are
rent-restricted and are occupied by tenants whose income does not
exceed the imputed income limitation that the taxpayer designated with
respect to the specific unit; and (ii) the average of the imputed
income designations of these units does not exceed 60 percent of AMGI.
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\1\ In the case of a project described in section 142(d)(6),
this ``40 percent'' is replaced with ``25 percent.''
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Special rules in section 42(g)(1)(C)(ii)(I) through (III) govern
the income limitations of low-income units as well as the role of those
limitations in the average income test. Under the 20-50 and 40-60
tests, the income limitations for all low-income units flow
automatically from the taxpayer's election of one of those two set-side
tests. In contrast, under the average income test, the electing
taxpayer must designate each unit's imputed income limitation, which
will then be taken into account in applying the test. In addition,
section 42(g)(1)(C)(ii)(III) requires the imputed income limitation
designated for any unit to be 20, 30, 40, 50, 60, 70, or 80 percent of
AMGI.
[[Page 46757]]
Under section 42(g), once a taxpayer elects to use a particular
set-aside test for a project, that election is irrevocable. Thus, once
a taxpayer has elected to use any of the three tests, the taxpayer may
not subsequently elect to use one of the others. Although a taxpayer
may have elected the 20-40 or 40-60 test before the average income test
became available, the later availability of the average income test
does not affect the irrevocability of the earlier election.
Under section 42(m)(1), every State or local housing credit agency
(Agency) making allocations of the ability to earn low-income housing
credits must have a qualified allocation plan (QAP) to guide it in
making those allocations.
Under section 42(m)(1)(B)(iii), a QAP must also contain a procedure
that the Agency (or its agent) will follow in monitoring noncompliance
with low-income housing credit requirements and in notifying the IRS of
any such noncompliance. See Sec. 1.42-5 of the Income Tax Regulations
for rules implementing this requirement.
Section 1.42-5(e)(2) provides that a QAP must require an Agency to
provide prompt written notice to the owner of a low-income housing
project if the Agency does not receive the certification described in
Sec. 1.42-5(c)(1), or does not receive, or is not permitted to
inspect, the tenant income certifications, supporting documentation,
and rent records described in Sec. 1.42-5(c)(2)(ii), or discovers by
inspection, review, or in some other manner, that the project is not in
compliance with the provisions of section 42.
Section 1.42-5(e)(4) both sets the correction period after an
Agency has notified an owner under Sec. 1.42-5(e)(2) and provides that
the correction period shall be that period specified in the monitoring
procedure during which an owner must supply any missing certifications
and bring the project into compliance with the provisions of section
42. The correction period is not to exceed 90 days from the date of the
notice to the owner described in Sec. 1.42-5(e)(2). An Agency may
extend the correction period for up to 6 months, but only if the Agency
determines there is good cause for granting the extension.
On October 30, 2020, the Department of Treasury (Treasury
Department) and the IRS published a notice of proposed rulemaking (REG-
119890-18) in the Federal Register (85 FR 68816) proposing regulations
setting forth guidance on the average income test under section
42(g)(1)(C) (2020 proposed regulations). On March 24, 2021, the
Treasury Department and the IRS held a public hearing on the 2020
proposed regulations.
The possibility of a ``cliff'' (as described in following two
paragraphs) was one of the main concerns that commenters expressed
regarding the 2020 proposed regulations. Almost all projects earning
low-income housing credits have more than the minimum number of low-
income units needed for the project to qualify for the credits. Thus,
with the 20-50 or 40-60 tests, a later discovery that some unit failed
to be a low-income unit generally would reduce the amount of credit
earned but would not totally preclude a project's eligibility.
By contrast, in response to the 2020 proposed regulations,
commenters were concerned about the following possibility with respect
to the average income test: Suppose that a taxpayer identified well
over 40 percent of units whose income limits averaged exactly 60
percent of AMGI, and further suppose that one of the units with the
lowest income limit turned out to fail the criteria for being a low-
income unit. In that case, the remaining units identified by the
taxpayer would have an average income above 60 percent. The commenters
were concerned that, in this situation and except for time-limited
mitigation measures described in the 2020 proposed regulations, the
2020 proposed regulations would apply the average income test to all
remaining units. Discovery of a single unit's failure might occur only
after the proposed mitigation measures were no longer available. Thus,
because no mitigation would be possible, the entire project would fail
the average income set-aside test and would be denied any low-income
housing credits. Some commenters called this total disqualification a
``cliff,'' and many believed that this result was inappropriate since,
despite the loss of that unit, at least 40 percent of the units in the
project were units whose income limits averaged to 60 percent or less
of AMGI.
On October 12, 2022, the Treasury Department and the IRS published
average-income-test final regulations (TD 9967) in the Federal Register
(87 FR 61489) (2022 final regulations). In the same Treasury decision,
the Treasury Department and the IRS published temporary regulations
providing recordkeeping and reporting requirements needed to facilitate
administrability of, and compliance with, the 2022 final regulations
(temporary regulations).
Under the 2022 final regulations, a project for residential rental
property meets the requirements of the average income test if the
taxpayer's project contains a qualified group of units that constitutes
40 percent \2\ or more of the residential units in the project. Section
1.42-19(b)(2)(i) requires the units in a qualified group to, first,
individually satisfy the criteria that would qualify each unit as a
low-income unit under section 42(i)(3) (the same criteria that apply to
the 20-50 or 40-60 set-asides). Specifically, the rules in Sec. 1.42-
19(b)(1)(i) through (iii) require that each unit be rent-restricted,
occupants of the unit meet the income limitation for the unit, and no
other provision in section 42 (including section 42(i)(3)(B) through
(E)) or the regulations thereunder denies low-income status to the
unit. In addition, Sec. 1.42-19(b)(2)(ii) requires that the average of
the designated imputed income limitations of the units in the group not
exceed 60 percent of AMGI. The qualified group of units must be
identified as required in Sec. 1.42-19(b)(3)(i).
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\2\ In the case of a project described in section 142(d)(6),
this ``40 percent'' is replaced with ``25 percent.''
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The Treasury Department and the IRS expected that commenters'
concerns would be fully assuaged by the qualified group approach in the
2022 final regulations, as implemented with the flexibility in the
temporary regulations.
In the same issue of the Federal Register in which the 2022 final
and temporary regulations were published, the Treasury Department and
the IRS published a notice of proposed rulemaking (REG-113068-22, 87 FR
61543) regarding the administration of the average income test (2022
proposed regulations). The text of the temporary regulations served as
the text of the 2022 proposed regulations.
Four public comments were submitted in response to the 2022
proposed regulations. The comments are available for public inspection
at www.regulations.gov or upon request.
The Treasury Department and the IRS considered all comments in the
development of this Treasury decision, which follows the basic
framework of the 2022 proposed and temporary regulations, with some
revisions. The following Summary of Comments and Explanation of
Revisions discusses the comments received and the revisions adopted.
In addition, the final regulations include some minor, non-
substantive revisions to the 2022 proposed regulations that are not
discussed in the Summary of Comments and Explanation of Revisions.
[[Page 46758]]
Summary of Comments and Explanation of Revisions
These final regulations provide recordkeeping and reporting
requirements for the average income test under section 42(g)(1)(C).
I. Impact of Noncompliant Unit Included in Identified Qualified Group
of Units
As with the 2020 proposed regulations, commenters expressed concern
that the temporary regulations (and thus the 2022 proposed regulations)
might be interpreted as again creating such a cliff effect in
circumstances where a taxpayer identified well over 40 percent of units
whose income limits averaged exactly 60 percent of AMGI. The commenters
stated that the temporary regulations could be interpretated as meaning
that a post-year-end discovery that one of the units with the lowest
income limit failed the criteria for being a low-income unit could
cause an entire project to lose eligibility to earn low-income housing
credits. Specifically, if the later-discovered noncompliant unit was in
the qualified group of units reported to the Agency to demonstrate
compliance with the average income test, then excluding that unit's
(below-60 percent of AMGI) income limit would cause the average of the
remaining units in the identified group to exceed 60 percent of AMGI.
Commenters also raised the possibility that the reported qualified
group might contain exactly 40 percent of the units in the project,
even though other units were available to include in the reported
qualified group. In that case, removing the now-disqualified unit would
reduce the qualified group of units to less than 40 percent of the
project's total units.
In such cases, commenters suggested that the taxpayer could have
taken steps to preserve the qualification of the project if the
regulations allowed other units to be substituted in the qualified
group that is used to satisfy the requirements of the average income
test. Some of the comment letters proposed revising Sec. 1.42-
19T(c)(4), regarding an Agency's waiver authority, to expressly allow a
taxpayer to submit a corrected group of qualified units.
The 2022 final regulations were intended to eliminate the risk of a
cliff. Consistent with that intention, the temporary regulations were
not intended to cause disqualification because of a post-year-end
discovery that one of the identified units failed the criteria for
being a low-income unit in circumstances where the taxpayer could have
identified a different group of qualified units. The purpose of the
recordkeeping and reporting rules for the average income test is
similar to the rules for the other set-aside tests. Thus, the rules in
the temporary regulations are intended to create a contemporaneous
record of the qualified groups of units. This record helps document and
later verify that the taxpayer met the requirements of the average
income test and correctly calculated the applicable fraction of the
building.
The Treasury Department and the IRS agree with commenters that the
final regulations should more clearly allow the submission of a
corrected qualified group when the taxpayer or Agency realizes that a
previously submitted group fails to be a qualified group. For example,
suppose that a unit with a 40 percent imputed income designation is
included in a reported qualified group but is later determined to have
been noncompliant during the relevant time period. In such a case,
submitting a revised qualified group can document both the removal of
that noncompliant unit and any removal of other units. For example,
simultaneously removing the noncompliant unit and one or more higher-
limitation units may be needed to reduce the average imputed income
designations of units in the identified group down to 60 percent or
less of AMGI. This updated reporting requirement will be helpful for
demonstrating that the average income test was met as of the prior year
end. It will also be useful for identifying more clearly the qualified
group of units to be used for calculating the applicable fraction.
Accordingly, these final regulations adopt the commenters'
suggestion to permit the submission of a corrected qualified group of
units. The Treasury Department and the IRS note that allowing
submission of a revised qualified group does not allow a taxpayer
retroactively to change income designations for any unit in a building
after a taxable year has closed. A change in an income designation is
not allowed even if a tenant's income would have supported a lower
designation prior to year end.
II. Reporting of Two Groups of Qualified Units
Proposed Sec. 1.42-19(c)(1)(ii) would require taxpayers to report
two separate groups of qualified units: (i) one for the minimum set-
aside test; and (ii) one for computing the applicable fractions of
buildings in the project. Some commenters suggested that reporting two
separate groups of qualified units is unnecessary because a single list
of all units submitted for determining the applicable fraction would
include the information needed to determine whether the minimum set-
aside is met. Under the definition of qualified group, the designations
of the low-income units in the applicable-fraction qualified group must
average 60 percent or less of AMGI. Thus, if that group includes at
least 40 percent of the units in the project, that group of units is a
qualified group that satisfies the average-income set-aside.
The commenters recommended that the final regulations streamline
the reporting process to allow a taxpayer to report to the Agency a
single qualified group of low-income units that is large enough to
include at least 40 percent of the residential units in the project.
This qualified group of units demonstrates compliance with the set
aside, and data on the units in each building represented in the group
is available to compute the applicable fraction(s) for each such
building.
Section 1.42-19(c) of the 2022 proposed regulations would give
Agencies flexibility to determine the best time and manner for
taxpayers to communicate the required information so that each Agency
can adopt a system that best serves that particular Agency. This
flexibility is intended to enable the Agency to minimize burden on the
Agency and taxpayers.
The Treasury Department and the IRS agree with commenters that one
list can be sufficient. However, it is important to maintain
flexibility for any Agency that finds two separate lists helpful. Thus,
the final regulations revise the language in the 2022 proposed
regulations to provide that Agencies have discretion to permit
taxpayers to report either one or two qualified groups of low-income
units. The final regulations also include examples illustrating the
application of this rule.
III. Timing of Agency Waiver
Proposed Sec. 1.42-19(c)(4) would provide Agencies with the
discretion, on a case-by-case basis, to waive in writing any failure to
comply with the proposed regulations' recordkeeping and reporting
requirements. The waiver may be granted up to 180 days after discovery
of the failure, whether by the taxpayer or Agency.
One commenter was concerned that 180 days may be insufficient to
address a failure, especially if the waiver discretion is being used to
remedy the ``cliff test'' reporting issue described earlier. This
commenter recommended revising the final regulations so that the 180-
day period starts with the determination of a designation or
[[Page 46759]]
identification failure, rather than a discovery of a failure. The
commenter suggested that this determination be defined as the Agency's
issuance to the IRS of Form 8823 (Low-Income Housing Credit Agencies
Report of Noncompliance or Building Disposition). Other commenters
recommended that the 180-day period start after the end of the
correction period in Sec. 1.42-5(e)(4) (90 days after notice from
Agency under Sec. 1.42-5(e)(2), plus up to an additional six months at
Agency's discretion).
The Treasury Department and the IRS considered these
recommendations, and the final regulations adopt a revised version of
the 2022 proposed regulations. These revisions align the Sec. 1.42-19
reporting requirements with the rules in Sec. 1.42-5. The modification
in Sec. 1.42-19(c)(4) is also necessary because the final regulations
now allow owners of low-income housing projects to submit a corrected
list upon discovery of a problem with a previously submitted list,
whether the discovery is by the taxpayer or Agency.
The final regulations in Sec. 1.42-19(c)(4) provide that a failure
to comply with the procedural requirements of Sec. 1.42-19(c)(1),
(c)(2), or (c)(3)(iv) is treated as corrected in three situations: (i)
if a taxpayer discovers the failure to comply, the taxpayer has up to
180 days after discovery of the failure to give the Agency a revised
submission, such as a revised qualified group of units; (ii) if an
Agency discovers a failure to comply, the Agency should provide prompt
notification in a manner similar to Sec. 1.42-5(e)(2), and then the
taxpayer must satisfactorily address the failure within the correction
period of Sec. 1.42-5(e)(4); or (iii) in all cases, an Agency has
discretion to waive in writing any failure to comply with the
procedural requirements of Sec. 1.42-19(c)(1), (c)(2), or (c)(3)(iv).
This waiver must occur within the applicable time period (dependent on
whether a taxpayer or Agency discovered failure). As indicated in the
preceding paragraph, the final regulations distinguish noncompliance
discovered by an Agency and noncompliance discovered by a taxpayer. In
the case of a taxpayer discovery, providing the taxpayer with 180 days
after discovery to give the Agency a revised submission should provide
sufficient time for taxpayers to comply, because the period does not
begin before taxpayers have knowledge, or an appreciation, that there
is, indeed, a failure.
In contrast, when an Agency discovers the failure, the final
regulations align with the rules that apply to an Agency discovery
under Sec. 1.42-5. The Agency must provide prompt notice under Sec.
1.42-5(e)(2) to start the correction period in Sec. 1.42-5(e)(4).
Aligning the Sec. 1.42-19 rules with the notice provision in Sec.
1.42-5(e)(2) and the correction period provided by Sec. 1.42-5(e)(4)
places taxpayers and Agencies in the same position with an Agency-
discovered average income issue as the taxpayer is in when the Agency
discovered that otherwise failed to certify under Sec. 1.42-5, or when
the Agency discovered any other noncompliance. The final regulations do
not adopt commenters' suggestion to start the correction period after a
``determination'' by the Agency. Under that suggestion, determination
means the issuance of a Form 8823 as detailed in Sec. 1.42-5(e)(3).
Adopting such a late deadline would misalign these rules with the rules
in Sec. 1.42-5. For example, when an Agency ``discovers'' that a
project is not in compliance with the provisions of section 42, Sec.
1.42-5(e)(2) requires the Agency to provide prompt written notice to
start the correction period in Sec. 1.42-5(e)(4). If, instead, a
``determination'' were required for an Agency-discovered error
regarding average-income, then the permitted correction period would
extend past the date of the correction period for other Agency-
discovered errors or failed certifications under Sec. 1.42-5(e)(4)
(such as correcting the physical noncompliance of a unit). The burden
on the taxpayer in this situation (submitting a corrected list of
units) does not justify a longer or different period of time than other
Agency-identified issues.
Effect on Other Documents
The temporary regulations are removed effective September 30, 2025.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
These final regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(July 4, 2025) between the Treasury Department and the Office of
Management and Budget regarding review of tax regulations.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
requires that a Federal agency obtain the approval of OMB before
collecting information from the public, whether such collection of
information is mandatory, voluntary, or required to obtain or retain a
benefit. The collections of information contained in these regulations
has been approved by OMB under control number 1545-0988.
Section 1.42-19(c)(1) provides recordkeeping and reporting
requirements related to the identification of a qualified group of
units for each of (i) satisfaction of the average income set-aside test
and (ii) applicable fraction determinations. Section 1.42-19(c)(2)
provides reporting requirements to the Agency with jurisdiction over a
project. Section 1.42-19(c)(3)(iv) provides recordkeeping and reporting
requirements related to designations of the imputed income limitations
for residential units. Section 1.42-19(d)(2) provides recordkeeping and
reporting requirements related to changing a unit's designated imputed
income limitation.
This information in the collections of information will generally
be used by the IRS and Agencies for tax compliance purposes and by
taxpayers to facilitate proper reporting and compliance. Specifically,
the collections of information in Sec. 1.42-19 apply to owners of
projects that receive the low-income housing credit and elect the
average income set-aside. With respect to the recordkeeping
requirements in Sec. 1.42-19(c)(3)(iv), and (d)(2), section
42(g)(1)(C)(ii)(I) requires that the taxpayer designate the imputed
income limitations of the units taken into account for purposes of the
average income test. Thus, the recordkeeping requirements that are
provided allow for a process of designation that will result in a
reliable record of both the original designations of the imputed income
limitations of low-income units and any redesignations of units'
limitations within a project.
The recordkeeping rules in Sec. 1.42-19(c)(1) with respect to a
qualified group of units are similarly needed to ensure there is a
reliable record to show that the units used for purposes of the average
income set-aside test and for determining a building's applicable
fraction were part of a group of units within the project whose average
designated imputed income limitations do not exceed 60 percent of AMGI.
This limitation is consistent with the requirement in section
42(g)(1)(C)(ii)(II). The annual reporting requirements in Sec. 1.42-
19(c)(1), (c)(3), and (d)(2) are also similar in substance to other
annual certifications required of taxpayers. For example, minimum
certifications by owners are required in qualified allocation plans as
provided in Sec. 1.42-5(c). The reporting requirements in these final
regulations also provide added flexibility by allowing the applicable
Agency to determine the time
[[Page 46760]]
and manner for the reporting under Sec. 1.42-19(c)(2)(i). Also, Sec.
1.42-19(c)(4) gives taxpayers the ability to correct failures and
maintains the Agencies the ability to waive any failure of reporting on
a case-by-case basis.
A summary of paperwork burden estimates follows:
Estimated number of respondents: Approximately 200 taxpayers
elected the average income test for just over 2,000 buildings between
2018 and 2022. When viewed annually, we project that approximately 100
additional taxpayers will have eligible buildings and 1,000 additional
buildings will be eligible under the average income test.
Estimated burden per response: We estimate that identifying which
units are for use in the average income set-aside test and applicable
fraction determinations and designating a unit's imputed income
limitation takes an average of 15 minutes per unit. Based on an
estimated average of 15 units per building and an average 15 minutes of
time per unit, an impacted taxpayer will incur an average of 225
minutes per building to record the additional designations due to the
flexibility under the regulations for the average income test. Total
average annual burden for recording the designations per building is
11,250 hours (15 units x 15 minutes x 3,000 buildings).
Taxpayers are also required to report redesignation of units, and
why they are required to redesignate units during the year. For
purposes of this analysis, we assume that an average of 4 units per
building will be redesignated annually. We estimate each redesignation
will take an average of 10 minutes. Thus, we estimate the average
number of minutes per year to record redesignations for an impacted
taxpayers to be 40 minutes per building for a total average annual
burden of 2,000 hours (40 minutes x 3,000 buildings).
In addition, we estimate an annual reporting burden related to the
expanded flexibility rules to average 20 minutes per impacted taxpayers
for a total burden of 100 hours (20 minutes x 300 taxpayers).
Estimated frequency of response: Annual.
Estimated total burden hours: The annual burden hours for this
regulation is estimated to be 13,350 hours. Using a monetization rate
of $56.60 per hour (2024 dollars), the burden for this regulation is
$755,610 for impacted taxpayers.
A Federal agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
collection of information displays a valid control number.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter
6), the Secretary of the Treasury hereby certifies that this final
regulation will not have a significant economic impact on a substantial
number of small entities. This certification is based on the fact that,
prior to the publication of this final regulation and before the
enactment of the 2018 Act, taxpayers were already required to satisfy
either the 20-50 test or the 40-60 test, as elected by the taxpayer, in
order to qualify as a low-income housing project. The 2018 Act added a
third minimum set-aside test (the average income test) that taxpayers
may elect. This final regulation sets forth requirements for the
average income test, and the costs associated with the average income
test are similar to the costs associated with the 20-50 test and 40-60
test.
As described in more detail in the PRA analysis section of the
preamble, approximately 200 taxpayers elected the average income test
for just over 2,000 buildings between 2018 and 2022. When viewed
annually, we project that approximately 100 additional taxpayers will
have eligible buildings and 1,000 additional buildings will be eligible
under the average income test. We estimate that identifying which units
are for use in the average income set-aside test and applicable
fraction determinations and designating a unit's imputed income
limitation takes an average of 15 minutes per unit. Based on an
estimated average of 15 units per building and an average 15 minutes of
time per unit, an impacted taxpayer will incur an average of 225
minutes per building to record the additional designations due to the
flexibility under the regulations for the average income test. In
addition, taxpayers are also required to report redesignation of units,
and why they are required to redesignate units during the year. For
purposes of this analysis, we assume that an average of 4 units per
building will be redesignated annually. We estimate each redesignation
will take an average of 10 minutes. Thus, we estimate the average
number of minutes per year to record redesignations for an impacted
taxpayer to be 40 minutes per building for a total average annual
burden of 2,000 hours. We also estimate an annual reporting burden
related to the expanded flexibility rules to average 20 minutes per
impacted taxpayer for a total burden of 100 hours.
IV. Section 7805(f)
Pursuant to section 7805(f), the proposed regulation was submitted
to the Chief Counsel for the Office of Advocacy of the Small Business
Administration for comment on its impact on small business, and no
comments were received. The Treasury Department and the IRS also
requested comments from the public.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This final rule does not include any Federal mandate that
may result in expenditures by State, local, or Tribal governments, or
by the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These regulations do not have
federalism implications and do not impose substantial direct compliance
costs on State and local governments or preempt State law within the
meaning of the Executive order.
VII. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a ``major rule,'' as defined by 5 U.S.C. 804(2).
VIII. Executive Order 13175: Consultation and Coordination With Indian
Tribal Governments
Executive Order 13175 (Consultation and Coordination With Indian
Tribal Governments) prohibits an agency from publishing any rule that
has Tribal implications if the rule either imposes substantial, direct
compliance costs on Indian Tribal governments, and is not required by
statute, or preempts Tribal law, unless the agency meets the
consultation and funding requirements of section 5 of the Executive
order. This final rule does not have substantial direct effects on one
or more Federally recognized Indian tribes and does not impose
substantial direct compliance
[[Page 46761]]
costs on Indian Tribal governments within the meaning of the Executive
order.
Drafting Information
The principal author of these regulations is Waheed Olayan, Office
of the Associate Chief Counsel (Energy, Credits, and Excise Tax).
However, other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entry for Sec. 1.42-19T to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.42-19 also issued under 26 U.S.C. 42(n);
* * * * *
Par. 2. Section 1.42-0 is amended by, in the table of contents for
Sec. 1.42-19, adding entries for (c)(1), (c)(1)(i) and (ii), (c)(2),
(c)(2)(i) and (ii), (c)(3)(iv), (c)(4), (c)(4)(i) through (iv), (d)(2),
and (f)(4) to read as follows:
Sec. 1.42-0 Table of contents.
* * * * *
Sec. 1.4219 Average income test.
* * * * *
(c) * * *
(1) Identification of low-income units for use in the average
income set-aside test or the applicable fraction determination.
(i) In general.
(ii) Recording and communicating.
(2) Notifications to the Agency with jurisdiction over a project.
(i) Agency flexibility.
(ii) Examples.
(3) * * *
(iv) Recording, retention, and annual communications related to
designations.
(4) Correcting failures to comply with procedural requirements.
(i) In general.
(ii) Discovery by taxpayer.
(iii) Discovery by Agency.
(iv) Waiver by Agency.
(d) * * *
(2) Process for changing a unit's designated imputed income
limitation.
* * * * *
(f) * * *
(4) Taxable years beginning on or after September 30, 2025.
Par. 3. Section 1.42-19 is amended by:
0
1. Adding paragraphs (c)(1) and (2), (c)(3)(iv), (c)(4), and (d)(2).
0
2. Revising paragraphs (f)(1) and (f)(2)(ii).
0
3. Adding paragraph (f)(4).
The revisions and additions read as follows:
Sec. 1.42-19 Average income test.
* * * * *
(c) * * *
(1) Identification of low-income units for use in the average
income set-aside test or the applicable fraction determination--(i) In
general. For a taxable year, a taxpayer must follow the procedures
described in paragraph (c)(1)(ii) of this section to identify--
(A) A qualified group of units that satisfy the average income set-
aside test; and
(B) A qualified group of units to be used to determine the
applicable fraction.
(ii) Recording and communicating. A taxpayer must--
(A) Record the identification in its books and records, where the
identification must be retained for a period not shorter than the
record-retention requirement under Sec. 1.42-5(b)(2); and
(B) Communicate the annual identifications to the applicable
housing credit agency (Agency) as provided in paragraph (c)(2) of this
section.
(2) Notifications to the Agency with jurisdiction over a project--
(i) Agency flexibility. An Agency may establish the time and manner in
which information is annually provided to it.
(ii) Examples. The following fact patterns illustrate some of the
approaches that paragraph (c)(2)(i) of this section allows an Agency to
use to establish the time and manner in which a taxpayer annually
provides information to the Agency.
(A) Example 1. Agency A requires taxpayers annually to submit a
single list reporting all low-income units in a qualified group to
be used by the taxpayer in determining the applicable fraction(s)
for all building(s) in the project. The identification of each unit
on the list must include the unit's imputed income designation.
Consequently, Agency A can identify within the list a group or
groups of units that constitute a qualified group that satisfies the
average income set-aside test and taxpayers are considered to have
identified a qualified group of units that satisfy the average
income test.
(B) Example 2. Agency B has the same requirements for taxpayers
as Agency A in paragraph (c)(2)(ii)(A) of this section (Example 1)
for the initial annual report, but thereafter Agency B permits
taxpayers, in lieu of a full list, to submit a statement describing
the differences from the previous year's information (or, when
applicable, by reporting that there are no such differences).
(C) Example 3. Agency C requires taxpayers to annually provide
two separate lists of low-income units: one list identifying the
qualified group of units for use in the average income set-aside;
and a second list identifying the qualified group of units for use
in the applicable fraction determination. The identification of each
unit on the lists must include the unit's imputed income
designation.
(3) * * *
(iv) Recording, retention, and annual communications related to
designations. A taxpayer designates a unit's imputed income limitation
by recording the limitation in its books and records, where it must be
retained for a period not shorter than the record retention requirement
under Sec. 1.42-5(b)(2). The preceding sentence applies both to units
whose first occupancy is as a low-income unit and to previously market-
rate units that are converted to low-income status. The designation
must also be communicated annually to the applicable Agency as provided
in paragraph (c)(2) of this section.
(4) Correcting failures to comply with procedural requirements--(i)
In general. If there is a failure to comply with the requirements of
paragraph (c)(1) or (2) or (c)(3)(iv) of this section and any of the
procedures described in paragraph (c)(4)(ii), (iii), or (iv) of this
section are followed, then the failure is treated as corrected and the
relevant requirements are treated as having been satisfied. In such
case, the tax consequences under this section correspond to that deemed
satisfaction.
(ii) Discovery by taxpayer. If a taxpayer discovers a failure to
comply, the taxpayer must submit a correction to the Agency. Such a
correction may be in the form of a revised qualified group of units.
This submission must occur not more than 180 days after discovery of
the failure.
(iii) Discovery by Agency. If an Agency discovers a failure to
comply, the Agency must provide prompt notification to the taxpayer in
a manner similar to the one described in Sec. 1.42-5(e)(2), and the
taxpayer must submit a correction to the Agency within a time period no
longer than the period described in Sec. 1.42-5(e)(4).
(iv) Waiver by Agency. In all cases, if a correction is required
due to a failure to comply with the requirements of paragraph (c)(1) or
(2) or (c)(3)(iv) of this section, then the Agency has the discretion
to waive that failure in
[[Page 46762]]
writing. For the waiver to be effective, this writing must be provided
to the taxpayer within the time limit described in paragraph (c)(4)(ii)
or (iii) of this section, as applicable.
(d) * * *
(2) Process for changing a unit's designated imputed income
limitation. The taxpayer effects a change in a unit's imputed income
limitation by recording the new designation in its books and records,
where it must be retained for a period not shorter than the record
retention requirement under Sec. 1.42-5(b)(2). The new designation
must also be communicated to the applicable Agency as provided in
paragraph (c)(2) of this section and must become part of the annual
report to the Agency of income designations. The prior designation must
be retained in the books and records for the period specified in
paragraph (c)(3)(iv) of this section. A designation under this
paragraph (d)(2) satisfies paragraph (c)(3) of this section.
* * * * *
(f) * * *
(1) In general. Except as provided in paragraphs (f)(3) and (4) of
this section, this section applies to taxable years beginning after
December 31, 2022.
(2) * * *
(ii) The designation required by paragraph (f)(2)(i) of this
section must comply with paragraphs (c)(3)(ii) and (iv) of this
section, without taking into account paragraph (c)(4) of this section.
Paragraph (c)(2) of this section applies to these designations, except
that the Agency may allow the notification to be made along with any
other notifications for the first taxable year beginning after December
31, 2022.
* * * * *
(4) Taxable years beginning on or after September 30, 2025.
Paragraphs (c)(1) and (2), (c)(3)(iv), (c)(4), (d)(2), and (f)(2)(ii)
of this section apply to taxable years beginning on or after September
30, 2025. For taxable years beginning before September 30, 2025, see
Sec. 1.42-19T as contained in 26 CFR part 1, as revised April 1, 2025.
For taxable years beginning before September 30, 2025, taxpayers,
however, may choose to apply the rules of paragraphs (c)(1) and (2),
(c)(3)(iv), (c)(4), (d)(2), and (f)(2)(ii) of this section, provided
the taxpayers apply the rules in their entirety and in a consistent
manner.
Sec. 1.42-19T [Removed]
Par. 4. Section 1.42-19T is removed.
Edward T. Killen,
Acting Chief Tax Compliance Officer.
Approved: September 19, 2025.
Kenneth J. Kies,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-19005 Filed 9-29-25; 8:45 am]
BILLING CODE 4830-01-P