Fall 2013 Issue of Horizons

tax benefits such as depreciation and operating losses.

investments to use the equity method of accounting.

3. The investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits is positive. 4. The investor is a limited liability investor in the affordable housing project for both legal and tax purposes. Currently, an investor may elect to use the effective yield method for an affordable housing investment made through a limited partnership only if items (3) and (4) above apply and if the availability of the tax credits allocable to the investor is guaranteed by a creditworthy entity.

Differing Methods The presentation of an investment in affordable housing tax credits is significantly different under the two methods. Under the equity method, investment costs are presented “above the line”, on a pretax basis while the tax credits and other benefits derived from the investment are presented as a component of ”below the line”, income tax provision. The equity method accounting treatment has resulted in geography issues on the investor’s income statement thereby distorting investment performance. Under the effective yield method of accounting, investment costs are netted with the related tax credits and other benefits and presented as a single net tax benefit component of the income tax provision, all “below the line”. The effective yield method of accounting leads to a much cleaner and understandable financial statement presentation and one the industry is confident will make it easier to attract new investors. Proposed Amendments The amendments to current standards would allow investors investing in qualified affordable housing projects to utilize the effective yield method of accounting if: 1. It is probable that the tax credits allocable to the investor will be available. 2. The investor retains no operational influence over the investment other than protective rights, and substantially all of the projected benefits are from tax credits and other

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