IRS Publishes Final Regulations on Utility Allowances
Changes to Actual Consumption Sub-metering from Renewable Energy Sources
On March 4, 2019, the IRS published final regulations to amend the utility allowance requirements for Low-Income Housing Tax Credit (LIHTC) projects.
While the final regulations carry forward many of the requirements in the temporary regulations published March 3, 2016, a few of the provisions were modified prior to being adopted in the final regulations. These changes are summarized below.
Energy obtained directly from renewable sources – Qualification as a Renewable Energy Source
Per 1.42-10 (e)(1)(i), an energy source may qualify as a renewable energy source described in Section 48 or Section 45, even if the building owner does not actually qualify for or receive any credits under Section 48 or Section 45 for the renewable energy source. (See 1.42-10(e)(1)(i)(D))
The text of paragraph 1.42-10(e)(1)(i)(C) in the temporary regulations was unclear as to whether the owner of the energy source had to qualify for, or receive credit for, the energy source in order for the energy source to meet the requirements of the 1.42-10(e)(1)(i).
The final regulations provided clarification by adding paragraph (D) to 1.42-10(e)(1)(i), which states: “Determinations under (e)(1)(i)(C)(1) and (2) take into account only the manner in which the energy is produced and not who owns it or whether the applicable portions of sections 48 and 45 have expired”.
Energy obtained directly from renewable sources – Utility Rates
When a renewable energy source is based on an actual-consumption sub-metering arrangement and the rate requirement is met, the utility cost is treated as being paid directly by the tenant(s) and not by, or through, the owner of the building.
In order to meet the sub-metering requirements, the rate charged to tenants must not exceed the highest rate that the tenants would have paid if they had obtained the utility from a local utility company. An owner can rely on the rates published by local utility companies when making this determination.(See 1.42-10(e)(1)(iv)(B))
The temporary regulations stated that the utility rate charged to the tenants would meet the sub-metering requirements if the rate charged to tenants “is the rate at which the local utility company would have charged the tenants in the unit for the utility if that entity had provided it to them.” This requirement did not provide enough information as to how building owners can demonstrate that the rate being charged to the tenants meets the requirements of 1.42-10(e)(1)(iv).
The final regulations provided clarification by amending the text of paragraph 1.42-10(e)(1)(iv)(B) to specify that the rate charged to the tenants cannot exceed the highest rate that the tenants would have paid for the utility from a local utility company.