A carryover allocation agreement is a legal document that allows a tax-exempt entity to transfer unused tax credits to another party. This agreement is used in situations where the tax-exempt entity cannot use all of its allocated tax credits in the current tax year.
The purpose of this agreement is to ensure that the tax credits are not wasted and can be used by another entity that can benefit from them. In essence, the carryover allocation agreement allows entities to share tax credits and promote community development.
The carryover allocation agreement is often used in the context of low-income housing tax credits (LIHTCs). LIHTCs are a federal tax incentive program for developers who build affordable housing. Developers can use LIHTCs to offset their tax liability or sell them to investors to raise capital.
In most cases, the LIHTCs are allocated to the developer of the affordable housing project. However, if the developer cannot use all of the allocated tax credits, they can enter into a carryover allocation agreement with another party. This agreement allows the other party to use the unused tax credits in a future tax year.
The carryover allocation agreement is typically governed by state law and must be approved by the appropriate regulatory agency. The agreement must also be filed with the IRS and state tax authorities.
In order to enter into a carryover allocation agreement, the parties must negotiate the terms of the agreement, including the amount of tax credits being transferred, the timing of the transfer, and any conditions or restrictions on the use of the tax credits.
One of the benefits of the carryover allocation agreement is that it promotes the development of affordable housing and other community development projects. By allowing unused tax credits to be transferred to another party, the agreement encourages collaboration between different entities and helps to maximize the impact of the tax credits.
In conclusion, the carryover allocation agreement is an important legal document that enables tax-exempt entities to share tax credits with other parties. This agreement is often used in the context of low-income housing tax credits and promotes community development. As with any legal agreement, it is important to consult with a qualified attorney to ensure that the agreement meets all legal requirements and protects the interests of all parties involved.