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Companies, particularly financial institutions, may invest in limited partnerships or limited liability companies that operate qualified affordable housing projects or invest in entities that operate qualified affordable housing projects. These investors earn federal tax credits as the principal return for providing capital to facilitate the development, construction, and rehabilitation of low-income rental property. Typically, an investor will account for its interest using the equity method by analogy as the investor will have a more than minor interest in the limited liability entity. Per ASC 323-740, investors in these entities may be eligible, subject to meeting a number of criteria, to elect to recognize the return they receive as a component of income taxes in the income statement under the proportional amortization method, rather than apply the equity method of accounting.
In order to be eligible for the election (see TX 3.3.8), the investor cannot have the ability to exercise significant influence over the operating and financial policies of the entity. This is evaluated using the indicators of significant influence for determining eligibility for the equity method of accounting (see EM 2.2). However, the general presumptions on voting stock ownership levels are not applicable for this evaluation (see EM 2.1). Therefore, care should be taken when evaluating the existence of significant influence for these entities.
Investors that do not qualify for the proportional amortization method (or do not elect to apply it) would account for their investments in these partnerships under the equity method if the investor has a more than minor interest in the investee.
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