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ARIZONA STATE SENATE
Fifty-Fifth Legislature, First Regular Session
AMENDED
contributions in aid of construction
Purpose
Allows a public service corporation operating a water system or sewage disposal facility to subtract the amount of monies or property received as a contribution in aid of construction when computing Arizona taxable income. Establishes the Affordable Housing Tax Credit and outlines requirements for the tax credit. Extends the Credit for Investment in a Qualified Small Business until June 30, 2031, and increases the transaction privilege tax (TPT) distribution to Diné College to $3,500,000 in FY 2021.
Contributions in Aid of Construction
For corporations,
Arizona gross income is the same as federal taxable income for the taxable
year. To determine a corporation's Arizona taxable income, the Arizona gross
income is statutorily adjusted by additions and subtractions of certain
expenses and income (A.R.S.
§§ 43-1101;
43-1121;
and 43-1122).
Federal law currently requires any contributions in the aid of construction to be included in corporate gross income (26 U.S.C. § 118). Prior to 2017, federal law allowed any amount of monies or property received from any person by a regulated public utility which provides water or sewage disposal services that was a contribution in aid of construction to be subtracted from corporate gross income (P.L. 104-118 § 1613). In 2017, the Tax Cuts and Jobs Act repealed the special rule for water and sewage disposal utilities (P.L. 115-97 § 13312).
A public service corporation includes all non-municipal corporations that: 1) furnish gas, oil or electricity for light, fuel or power; 2) furnish water for irrigation, fire protection or other public purposes; 3) furnish hot or cold air or steam for heating or cooling purposes; 4) collect, transport, treat, purify and dispose of sewage through a system, for profit; 5) transmit messages or furnish public telegraph or telephone service; and 6) operate as common carriers (Ariz. Const. Art. 15 § 2).
Low-Income Housing Tax Credit (LIHTC)
The Arizona Department of Housing (ADOH) was established to address affordable housing issues in Arizona, including availability of affordable housing for low-income and medium-income families and special needs-adapted housing (A.R.S. § 41-3953). The LIHTC Program was enacted by the U.S. Congress in 1986 to promote the development of affordable rental housing for low-income individuals and families. A low-income housing tax credit is a dollar-for-dollar credit against the federal income tax liability of the owner each year over a period of 10 years. The amount of the annual credit is based on the amount invested in the affordable housing. The Internal Revenue Service allocates housing tax credits to designated state agencies which then award the credits to developers of qualified projects. ADOH allocates available tax credits each year in Arizona (A.R.S. § 35-728).
Credit for Investment in Qualified Small Businesses
For taxable years beginning January 1, 2007, through December 31, 2024, a credit is allowed against income tax liability for investments made after June 30, 2006, in qualified small businesses. The Arizona Commerce Authority (ACA) authorizes tax credits for each qualified investor who makes a qualified investment in a qualified small business. The credit amount is: 1) 12 percent of the amount invested per year for the first and second taxable years after the investment is made and 11 percent of the amount invested for the third taxable year after the year in which the investment is made if the qualified investment is made in a qualified small business that maintains its principal place of business in a rural county in Arizona or is a bioscience enterprise; or 2) 10 percent of the investment amount for each of the three taxable years after the year in which the investment is made if the qualified investment is made in any other qualified small business (A.R.S. §§ 43-1074.02 and 41-1518).
There may be a fiscal impact to the state General Fund by allowing public service corporations operating a water system or sewage disposal facility to subtract contributions in aid of construction when computing Arizona taxable income and not conforming with federal changes to contributions in aid of construction for water system and sewage disposal utilities. S.B. 1124 requires ADOH to allocate $4,000,000 in FY 2022 through FY 2026 for the Affordable Housing Tax Credit and reducing the state General Fund.
Provisions
1. Requires, when computing Arizona taxable income for a public service corporation operating a water system or sewage disposal facility, the amount of monies or property received as a contribution in aid of construction to be subtracted from Arizona gross income.
2. Becomes effective on the general effective date, retroactive to the taxable year beginning January 1, 2021.
Affordable Housing Tax Credits
3. Establishes the Affordable Housing Premium Tax Credit which is allowed against incurred premium tax if the ADOH issues an eligibility statement for a qualified project.
4. Establishes the individual and corporate Affordable Housing Tax Credit and requires ADOH to administer the credits.
5. Specifies that the taxpayer must furnish:
a) the required premium tax return for the Affordable Housing Premium Tax Credit to be authorized; or
b) the required income tax return for the individual or corporate Affordable Housing Tax Credit to be authorized.
6. Requires ADOH to issue an eligibility statement for each project that identifies the qualified project, the allocation year and the amount of the credits allocated to the project.
7. Requires ADOH to allocate Affordable Housing Tax Credits for projects in Arizona that qualify for LIHTC and that are placed in service, beginning July 1, 2022, in an amount equal to at least 50 percent of the amount of the federal credit allowed in each tax year (TY) during the federal credit period.
8. Sets the amount of the Affordable Housing Premium Tax Credit and the individual and corporate Affordable Housing Tax Credit equal to at least 50 percent of the amount of the LIHTC for the qualified project.
9. Allows, on notice to DIFI, the Affordable Housing Premium Tax Credit to be allocated among the partners, members or shareholders as seen fit and prohibits the total of the allocated credits from exceeding the amount of the approved credit.
10. Allows, on notice to ADOR, the individual and corporate Affordable Housing Tax Credit to be allocated among the partners, members or shareholders as seen fit and prohibits the total of the allocated credits from exceeding the amount of the approved credit.
11. Specifies that a partner, member or shareholder is not prohibited from holding an investment exclusively in either the state credits or federal credits allocated to the qualified project.
12. Requires ADOH to allocate the Affordable Housing Tax Credit according to ADOH's current qualified allocation plan.
13. Requires ADOH to allocate a total of $4,000,000 for the Affordable Housing Tax Credit in any calendar year (CY).
14. Specifies that an approved amount applies against the credit dollar limit for the year the application is submitted and any unused balance of the current CY cap must be reallocated for the credit in the following year.
15. Allows any taxpayer that owns an interest in an investment in a qualified project that receives an eligibility statement from ADOH, to claim an Affordable Housing Tax Credit for TYs beginning January 1, 2022, if the taxpayer acquires interest before filing a tax return claiming the credit.
16. Requires a taxpayer to apply the Affordable Housing Tax Credit against the taxpayer's insurance premium or income tax liability as provided by and subject to the statutorily prescribed procedures, terms and conditions.
17. Deems a qualified project that is approved for the Affordable Housing Tax Credit ineligible for any abatement, exemption or other reduction in state or local ad valorem property taxes.
18. Requires ADOH, by July 30, to annually hold a public hearing to solicit and accept public comments on the Affordable Housing Tax Credit to be used for qualified projects that are financed through tax-exempt bond issuance.
19. Requires ADOH to post a copy of all comments submitted during a public hearing on ADOH's website by September 15 of the year in which the hearing was held.
20. Requires the taxpayer to submit an ADOH-provided eligibility statement to DIFI with the taxpayer's premium tax return in order to claim the Affordable Housing Premium Tax Credit.
21. Stipulates that if the amount of the Affordable Housing Premium Tax Credit exceeds the taxpayer's state premium tax liability, the excess amount may be carried forward for up to five consecutive TYs.
22. Subjects the Affordable Housing Premium Tax Credit to recapture in a proportional amount from all taxpayers that claimed the credit, if the LIHTC is subject to recapture under the U.S. Internal Revenue Code during the first 10 TYs after the project is placed in service.
23. Specifies that the recapture is calculated by increasing the amount of taxes imposed in the following year by the amount recaptured.
24. States that a taxpayer who claims a tax credit against state premium tax liability is not required to pay any additional retaliatory tax as a result of claiming the tax credit and allows the credit to fully offset any retaliatory tax imposed.
25. Requires DIFI, ADOH and ADOR to adopt rules and publish and prescribe forms and procedures to administer the tax credits and requires ADOH to include criteria on which eligibility statements are issued.
26. Requires ADOH to prescribe forms, procedures and criteria for applying, evaluating and qualifying for the Affordable Housing Tax Credit.
27. Requires ADOH, by December 31, to annually submit a report to the President and the Speaker that addresses whether the approved Affordable Housing Tax Credits produced a significant number of additional affordable housing units in Arizona and that analyzes the economic impacts of the credit.
28. Requires ADOH to provide a copy of the annual report to the Secretary of State.
29. Requires ADOH to implement and administer the statutory requirements relating to the Affordable Housing Tax Credit for Arizona's 2022 qualified allocation plan.
30. Repeals the Affordable Housing Premium Tax Credit and the individual and corporate Affordable Housing Tax Credits on January 1, 2026.
31. Specifies that the repeal of the individual and corporate Affordable Housing Tax Credit and the Affordable Housing Premium Tax credit do not:
a) limit or impair the issuance of premium tax credits or income tax credits for qualified projects that receive a reservation from ADOH before December 31, 2025, or a taxpayer's ability to redeem a credit; or
b) affect any act done or right accruing or accrued or any suit or proceeding had or commenced in any civil cause of action before the repeal of the credits.
Affordable Housing Tax Credit Review Committee (Review Committee)
32. Establishes the nine-member Review Committee consisting of:
a) three members appointed by the Governor, no more than two of whom are from the same political party;
b) three members appointed by the President of the Senate, no more than two of whom are from the same political party; and
c) three members appointed by the Speaker of the House of Representatives, no more than two of whom are from the same political party.
33. Specifies that appointed members serve at the pleasure of the person who made the appointment.
34. Specifies that members are not eligible for compensation and allows members to receive reimbursement for outlined expenses.
35. Requires the Review Committee to review the individual and corporate Affordable Housing Tax Credit and the Affordable Housing Premium Tax Credit on the third year after the effective date of this legislation and every three years thereafter.
36. Requires the Review Committee's review to include:
a) the history, rationale and estimated revenue impact of each credit;
b) whether the credit has provided a benefit to Arizona that includes, for corporate tax credits, measurable economic development, new investments, creation of new jobs or retention of existing jobs in Arizona;
c) whether the credit is unnecessarily complex in the application, administration or approval processes; and
d) the number of housing units generated as a result of each credit and the average income of residents offered housing units.
37. Requires the Review Committee to report its findings and recommendations to the Legislature and Governor by December 15 of the year of the credit review and to provide a copy to the Secretary of the State.
38. Terminates the Review Committee on January 1, 2026.
Credit for Investment in Qualified Small Businesses
39. Extends, from December 31, 2024, to December 31, 2034, the individual Credit for Investment in Qualified Small Businesses.
40. Allows the ACA to authorize an additional $2.5 million in tax credits each FY, plus any unused credit capacity that carries over from preceding FYs.
41. Prohibits the ACA from authorizing additional credits after June 30, 2031, rather than June 30, 2021.
42. Requires the State Treasurer to transmit $3,500,000 from TPT revenues received on the reservation in FY 2021 to a single community college with a full-time equivalent enrollment of at least five hundred students for fiscal year 2020, instead of the statutorily required amount of $1,750,000.
Miscellaneous
43. Defines Internal Revenue Code, qualified project and taxpayer.
44. Contains a purpose clause which states that the purpose is to support the construction of new affordable housing projects in Arizona.
45. Makes technical and conforming changes.
46. Becomes effective on the general effective date, with a retroactive provision as noted.
Amendments Adopted by the House
1. Establishes the Affordable Housing Premium Tax Credit and the individual and corporate Affordable Housing Tax Credit.
2. Requires ADOH to administer the Affordable Housing Tax Credit and sets the amount of the Affordable Housing Tax Credit equal to at least 50 percent of the amount of the LIHTC for the qualified project.
3. Allows the tax credit to be allocated among partners, members and shareholders upon:
a) notice to ADOR for the individual and corporate Affordable Housing Tax Credit; and
b) notice to DIFI for the Affordable Housing Premium Tax Credit.
4. Requires ADOH to allocate a total of $4,000,000 for the Affordable Housing Tax Credit in any CY.
5. Requires a taxpayer to apply the Affordable Housing Tax Credit against the taxpayer's insurance premium or income tax liability as provided by and subject to the statutorily prescribed procedures, terms and conditions.
6. Specifies that if the amount of the Affordable Housing Premium Tax Credit exceeds the taxpayer's state premium tax liability, the excess amount may be carried forward for up to five consecutive TYs.
7. Outlines additional requirements, stipulations and guidelines related to the Affordable Housing Tax Credit
8. Requires ADOH to prescribe forms, procedures and criteria for applying, evaluating and qualifying for the Affordable Housing Tax Credit.
9. Requires ADOH to allocate the Affordable Housing Tax Credit according to ADOH's current qualified allocation plan and to implement and administer the statutory requirements relating to the Affordable Housing Tax Credit for future qualified allocation plans.
10. Requires DIFI, ADOH and ADOR to adopt rules and publish and prescribe forms and procedures to administer the tax credits.
11. Establishes a nine-member Review Committee to review the individual and corporate Affordable Housing Tax Credit and the Affordable Housing Premium Tax Credit every three years.
12. Outlines reporting requirements for ADOH and the Review Committee.
13. Requires ADOH to annually hold a public hearing to solicit and accept public comments on the Affordable Housing Tax Credit to be used for qualified projects that are financed through tax-exempt bond issuance and to post the comments on ADOH's website.
14. Repeals the Affordable Housing Premium Tax Credit and the individual and corporate Affordable Housing Tax Credits on January 1, 2026.
15. Terminates the Review Committee on January 1, 2026.
16. Extends, from December 31, 2024, to December 31, 2034, the individual Credit for Investment in Qualified Small Businesses.
17. Extends, from June 30, 2021, to June 30, 2031, the authorization of the Credit for Investment in Qualified Small Businesses and allows the ACA to certify credits up to $2,5000,000 each fiscal year.
18. Directs the State Treasurer to distribute $3,500,000 from TPT revenues in FY 2021 to a community college with a full-time student equivalent of at least 500 students for FY 2020.
19. Defines terms.
20. Makes technical and conforming changes.
Senate Action House Action
APPROP 1/19/21 DP 8-0-2 WM 3/10/21 DP 9-1-0-0
3rd Read 2/1/21 29-1-0 3rd Read 6/28/21 36-22-2
Prepared by Senate Research
June 29, 2021
LMM/DH/kn