For affordable housing developers, the LIHTC cost certification is the document that turns a credit reservation into actual tax credits. After a project is placed in service, an independent CPA certifies the development’s costs and eligible basis, and the state housing finance agency relies on that certification to set the final credit amount. A 2025 change to the bond financing rules also reshaped how many 4 percent deals can move forward, making accurate cost certification more consequential than ever.
The LIHTC cost certification sits at the point where construction spending becomes a verified tax position. It is the bridge between what a developer spent and what the IRS will ultimately recognize as the basis for credits claimed over the next decade. Because the figures feed a federal benefit and a long compliance period, the quality of the certification shapes the project’s economics for years.
Quick answer: A LIHTC cost certification is an independent accounting of a Low-Income Housing Tax Credit project’s total development costs and eligible basis, prepared by a CPA familiar with Internal Revenue Code Section 42 after the project is placed in service. The state housing finance agency uses it to determine the final credit allocation and to issue IRS Form 8609. Separately, the 2025 reconciliation legislation lowered the tax-exempt bond financing test for 4 percent credits from 50 percent to 25 percent for buildings placed in service after December 31, 2025, provided at least 5 percent of aggregate basis is financed by bonds issued after that date.
This article explains what the LIHTC cost certification is, what a CPA actually verifies, how the new 25 percent bond test changes deal structuring, and how developers should prepare.
What Is a LIHTC Cost Certification?
The Low-Income Housing Tax Credit, created under Section 42 of the Internal Revenue Code, is the primary federal tool for financing affordable rental housing. State housing finance agencies allocate the credits, and developers claim them over a 10-year period in exchange for keeping units affordable for an extended compliance period.
Two credit types operate under the same statute. Competitive 9 percent credits are awarded through a state’s annual allocation round, while 4 percent credits are paired with tax-exempt bond financing and are not subject to the same competitive cap. Both rely on a cost certification to fix the final credit, and both require the owner to track eligible basis with care from the start of construction.
The cost certification comes at the end of the development phase, once the project is placed in service. The owner submits a certification of total development costs to the housing finance agency, and for most allocations the agency requires that certification to be examined by an independent CPA. The CPA’s report separates costs that count toward eligible basis from those that do not, and that distinction drives the size of the credit.
The numbers in the certification carry directly into the credit calculation. Eligible basis, reduced and adjusted as Section 42 requires, becomes qualified basis, which determines the annual credit. The housing finance agency uses the certified figures to issue IRS Form 8609, the form that allows the owner to begin claiming credits, and the final credit is generally the lesser of the amount allocated or the amount the cost certification supports.
Form 8609 is the hinge between certification and cash flow. Once the agency completes and issues it, the owner can begin claiming the credit on its return over the 10-year credit period. A separate Form 8609 is issued for each building in a project, so the cost certification has to support the basis attributed to every building, not just the project as a whole.
What a CPA Actually Verifies
A cost certification is not a rubber stamp on the developer’s spreadsheet. The CPA tests whether the reported costs were actually incurred and paid, whether they are properly classified, and whether they belong in eligible basis under Section 42. Getting these distinctions right is the heart of the engagement.
Several categories require particular care. Land is never part of eligible basis, so it must be separated cleanly from building costs. Certain financing costs, syndication and marketing expenses, and reserves are generally excluded as well, while construction, certain professional fees, and qualifying development costs are included. Misclassifying ineligible costs as eligible overstates the credit and creates audit exposure for the owner.
The CPA also examines the developer fee for reasonableness and compliance with the housing agency’s limits, scrutinizes identity-of-interest transactions where the developer and a contractor or supplier are related, and confirms the timing rules that govern when costs and the placed-in-service date are met. For competitive 9 percent deals, the analysis often ties back to the carryover allocation and the requirement that the owner incur more than 10 percent of reasonably expected basis by the applicable deadline.
Because the certification feeds a federal tax benefit claimed over a decade, errors are costly and durable. A clean, well-supported cost certification protects the credit the developer expects and reduces the risk of a later IRS adjustment.
The credit itself flows through to the owner’s return, where the annual amount is reported on IRS Form 8586 as part of the general business credit. An overstatement that survives the certification can therefore propagate across multiple tax years before it is caught, which is why the verification step is treated as a control rather than a formality.
The New 25% Bond Test and Why It Matters
The structure of a 4 percent LIHTC deal has long depended on a financing test. Under Section 42(h)(4)(B), a bond-financed project could claim 4 percent credits on its qualified low-income units only if at least 50 percent of the project’s aggregate basis was financed with tax-exempt private activity bonds drawn from the state’s volume cap.
That 50 percent test created a persistent bottleneck. Private activity bond cap is a limited resource, and requiring half of every deal’s basis to be bond-financed meant the cap ran out in many states, leaving viable affordable housing projects unable to access 4 percent credits.
The 2025 reconciliation legislation changed that. For buildings placed in service after December 31, 2025, the financing test drops from 50 percent to 25 percent, provided at least 5 percent of the building’s aggregate basis is financed by bonds issued after December 31, 2025. By cutting the required bond share in half, the change lets a given amount of bond cap support roughly twice as many 4 percent deals, which is among the most significant structural changes to the program in its history.
For cost certification, the lower threshold raises the stakes on accuracy. Aggregate basis, the denominator in the bond test, must be measured correctly, and the relationship between bond proceeds and basis has to be documented to support that the project meets the 25 percent requirement. Developers structuring deals around the new test should align their financing and their cost reporting from the outset. Pease Bell supports owners and developers through its real estate practice, where cost certification and basis analysis are core work.
How Developers Should Prepare
Preparation for a clean cost certification begins during construction, not after. Developers who maintain organized records of every development cost, with invoices, contracts, and proof of payment tied to each line, give the CPA the documentation needed to support eligible basis without a scramble at the end.
Cost classification deserves attention throughout the project. Tracking land, building, financing, and soft costs in distinct categories as they are incurred makes the eligible-versus-ineligible determination far cleaner than reconstructing it later. Identity-of-interest relationships should be identified and documented early, since these draw the closest scrutiny.
Engaging an experienced Section 42 CPA before the placed-in-service date, rather than after, lets the developer resolve classification questions while there is still time to gather support. With the new 25 percent bond test in play, early coordination between the financing structure and the cost certification is especially valuable. Pease Bell’s audit and assurance team and its HUD practice help developers align these pieces so the final credit holds up.
Frequently Asked Questions
What is a LIHTC cost certification?
It is an independent CPA’s accounting of a Low-Income Housing Tax Credit project’s total development costs and eligible basis, prepared after the project is placed in service. The state housing finance agency uses it to set the final credit amount and issue IRS Form 8609.
What does the CPA verify in a cost certification?
The CPA tests that costs were actually incurred and paid, that they are properly classified between eligible basis and ineligible costs such as land and certain financing and marketing expenses, that developer fees comply with agency limits, and that identity-of-interest and timing rules are met.
What changed with the 4% LIHTC bond test?
The 2025 reconciliation legislation lowered the tax-exempt bond financing test from 50 percent to 25 percent of aggregate basis for buildings placed in service after December 31, 2025, provided at least 5 percent of aggregate basis is financed by bonds issued after that date. This allows limited private activity bond cap to support more 4 percent deals.
When is the cost certification prepared?
It is prepared after the project is placed in service, and the housing finance agency relies on it to issue IRS Form 8609 so the owner can begin claiming credits.
A LIHTC cost certification is where a development’s financial record becomes the basis for a decade of tax credits, and the new 25 percent bond test only increases the value of getting it right. Developers who keep disciplined cost records, classify expenses correctly as they go, and engage a Section 42 CPA early are the ones whose credits stand up to scrutiny.
