June 30, 2010
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Many Georgia surplus lines brokers may not be aware of the option to offset Georgia’s surplus lines tax through Georgia low-income housing tax credits (“Georgia Credits”). The Georgia Credits were originally proposed to offset state income tax but were expanded in 2001 to also allow credit against surplus lines tax, premium tax and premium taxes paid by risk retention groups.
Under Section 42 of the Internal Revenue Code, Federal Credits are available with respect to “qualified low-income residential properties,” that is, residential rental properties in which (a) 20% or more of the aggregate residential rental units are occupied by tenants with incomes of 50% or less of area median income, as adjusted for family size (the “20-50 Set-Aside Test”) or (b) 40% or more of the aggregate residential rental units are occupied by tenants with incomes of 60% or less of area median income, as adjusted for family size (the “40-60 Set-Aside Test”) (each test being the “Minimum Set-Aside Test”). Additionally, the gross rent charged to tenants of units comprising the Minimum Set-Aside cannot exceed 30% of the applicable Set-Aside income (50% or 60% of area median income) for a family of a specified size (the “Rent Restriction Test”). Georgia Credits are allowed with respect to residential properties in Georgia placed in service after January 1, 2001 which qualify for Federal Credits. Federal Credits are delivered during the first ten years a property meets the minimum requirements, although a property needs to remain in compliance with specific low-income housing rules for a full 15-year period. The Georgia Department of Community Affairs administers the Georgia Credit program subject to rulings from the Georgia Department of Revenue and Department of Insurance.
How Georgia Credits Work in Practice
Georgia Credits may be allocated among some or all of the partners, members, or shareholders of the entity owning the low-income housing project in any manner agreed to by such persons, whether or not such persons are allocated or allowed any portion of the Federal Credit with respect to the project. Thus, for example, to receive an allocation of Georgia Credits, an investor must be admitted (directly or indirectly) into the project-owning entity (such as a partnership or limited liability company) as an owner. The governing documents of the project-owning entity (such as a partnership agreement or limited liability agreement) dictate how the Georgia Credits are to be allocated among the owners.
When a surplus lines broker buys into a low income housing fund, Georgia Credits are normally sold and delivered over ten years. However, due to extraordinary circumstances, some banks have been selling one-year Georgia Credits. Georgia Credits are sold on a standalone basis and at a discount which creates a positive rate of return on funds which would otherwise be paid as taxes. A surplus lines broker who purchased Georgia Credits files Form IT-HC (typically provided by the bank) with his Georgia quarterly surplus lines tax affidavit. Georgia Credits are normally delivered in the first quarter for the previous tax year. As mentioned, the Georgia Credits offset surplus lines taxes dollar for dollar. So, for example, a $100 of Georgia Credits will offset $100 of Georgia surplus lines taxes. Any un-used Georgia Credits may be carried forward for up to three years, but cannot be applied to previous years’ returns.
Tony Roehl is a member of Morris, Manning & Martin, LLP’s Insurance and Reinsurance and Corporate Practices. Mr. Roehl’s principal areas of concentration are insurance regulation and corporate matters involving entities within the insurance industry. Mr. Roehl received his bachelor’s degree from the University of Florida and his law degree from the University of Michigan.
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