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Eligible Basis and Qualified Basis

IRS IRC § 42 Audit Technique Guide — Part I (Introduction and Pre-Contact Analysis) · 2026 edition · updated 2026-07-29 · United States

Compare the Maximum Qualified Basis identified on line 3a by the state agency and the eligible basis identified on line 7 by the taxpayer.

  • If the numbers are the same, then (1) the building was intended to be a 100% low-income building and (2) the state agency determined that it was necessary to allocate the maximum amount of credit possible to assure that the project would remain feasible throughout the 15-year compliance period.

  • If the eligible basis is more than the qualified basis, then either the building is a mixeduse building (both low-income and market-rate units) or the state agency determined that it was not necessary to allocate the maximum amount of credit possible to assure that the project would remain feasible throughout the 15-year compliance period.

  • If the eligible basis is less than the maximum qualified basis, the issue should be addressed during the audit.

If the percentage on line 3b is larger than 100%, then the eligible basis identified on line 7 has been artificially increased above the actual costs because the building is in a location that is considered difficult to develop; e.g., the costs of construction, land, and utilities are high compared to the location's Area Median Gross Income or there is a particularly high concentration of low-income individuals. The increased eligible basis increases the amount of credit available to subsidize costs that cannot be supported by debt or future cash flow from rents.

There should be a one-to-one match of Forms 8609 to Forms 8609-A filed with the tax return. Compare the eligible basis on Form 8609, line 7, to the eligible basis identified on Form 8609-A, line 1. The numbers should be the same. If the eligible basis on Form 8609-A, line 1, is less than reported on Form 8609, then a recapture event may have occurred and the issue needs to be addressed during the audit. The eligible basis on Form 8609-A, line 1, should never be larger than the eligible basis reported on Form 8609, line 7.

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▸ Contents — IRS IRC § 42 Audit Technique Guide — Part I (Introduction and Pre-Contact Analysis)
IRS IRC § 42 Audit Technique Guide — Part I (Introduction and Pre-Contact Analysis)
  1. IRC §42, Low-Income Housing Credit - Part I Introduction and P…
  2. Chapter 1 Introduction
  3. Topics
  4. Overview of the IRC §42 Program
  5. Types of Housing
  6. Combining with Other Tax Credits
  7. Computation of Allowable Annual Credit
  8. Eligible Basis
  9. Applicable Fraction
  10. Qualified Basis
  11. Applicable Percentage
  12. Compliance Requirements
  13. Credit Disallowance and Recapture
  14. State Housing Agency Responsibilities
  15. Qualified Allocation Plan (QAP)
  16. Allocating Credits
  17. Compliance Monitoring
  18. Reporting Noncompliance to the IRS
  19. Annual Report to the IRS
  20. IRS Responsibilities: Chief Counsel
  21. IRS Responsibilities: LIHC Compliance Unit
  22. Form 8610, with Form 8609 and Schedule A (Form 8610)
  23. Form 8823
  24. Form 8821
  25. IRS Responsibilities: Audits
  26. Summary
  27. Chapter 2 Pre-contact Analysis
  28. Introduction
  29. Topics
  30. Form 8609, Low-Income Housing Credit Allocation and Certificat…
  31. Amount of Credit Allocated
  32. Eligible Basis and Qualified Basis
  33. Applicable Percentage
  34. Type of Allocation
  35. Tax-Exempt Bonds
  36. Nonprofit Set-Aside
  37. Credit Period: BINs, Dates, and Elections
  38. Multi-Building Projects
  39. Minimum Set-Aside
  40. Property Address
  41. Form 8823, Low-Income Housing Credit Agencies Report of Noncom…
  42. Reconciliation to Forms 8609
  43. Rental Units
  44. Period of Noncompliance
  45. Categories of Noncompliance
  46. Dispositions
  47. Form 8609-A, Annual Statement for Low-Income Housing Credit
  48. Part I, Compliance Information
  49. Part II, Computation of Credit
  50. Balance Sheet
  51. Land Values
  52. Buildings and Other Depreciable Assets
  53. Accounts Receivable and Payable
  54. Schedule K and Schedule K-1
  55. Ownership By Individuals
  56. Prior and Subsequent Year Returns
  57. Related Returns
  58. Partners: Consistent Treatment
  59. General Partner: Additional IRC §42 Projects
  60. Risk Analysis
  61. Example 1: Estimating Potential Tax
  62. Initial Information Document Request
  63. General Information about the Taxpayer
  64. Tax Returns
  65. Eligible Basis
  66. Qualifying Low- Income Households
  67. 1st and 11th Year of the Credit Period
  68. Additions to Qualified Basis
  69. Examination of Income: Rents & Other Sources of Income
  70. Noncompliance
  71. Dispositions
  72. IDR & Crosswalk to Issues
  73. Summary
  74. Exhibit 2-1 IDR & Crosswalk to Issues
  75. General Information about the Credit Allocation
  76. Eligible Basis
  77. Qualifying Low- Income Households
  78. 1st and 11th Year of the Credit Period
  79. Additions to Qualified Basis
  80. Rents & Other Sources of Income (Minimum Income Probes)
  81. Noncompliance
  82. Dispositions
  83. Chapter 3 Audit Techniques
  84. Introduction
  85. Topics
  86. Interviewing Taxpayers
  87. Background and Financial History
  88. Business Practices
  89. Internal Controls
  90. Compliance with IRC §42
  91. Physical Maintenance
  92. Tenant Qualifications
  93. Tenant Files
  94. Rents
  95. Cash Flows
  96. Community Service Facilities
  97. Forms 8823
  98. Prior and Subsequent Year Tax Returns
  99. Large, Unusual, or Questionable Items
  100. Related Parties or Returns
  101. Touring IRC §42 Projects
  102. Preparing for Tour of an IRC §42 Project
  103. Physical Characteristics to Observe When Touring IRC §42 Proje…
  104. Rents
  105. Income Qualifying New Tenants
  106. Mixed-Use Projects
  107. Community Service Facilities
  108. Analyzing Results
  109. Case File Documentation
  110. Evaluating Internal Controls
  111. Control Environment
  112. Accounting System
  113. Control Procedures
  114. Testing Internal Controls
  115. Establishing Scope and Depth of the Audit
  116. Third Party Contacts
  117. Contacting State Agencies
  118. Other Third Party Contacts
  119. Summary

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