The New Markets Tax Credit (NMTC) program is a federal incentive designed to spur private investment in economically distressed communities. By offering tax credits to investors, the NMTC program aims to encourage investment in areas that have traditionally lacked access to capital, thereby fostering economic development and creating jobs.
Background and Purpose of the NMTC Incentive
The NMTC program was established by Congress as part of the Community Renewal Tax Relief Act of 2000. Its primary goal is to stimulate investment in low-income communities by providing investors with a tax credit program against their federal income tax. These investments are meant to drive economic growth, create jobs, and support businesses and services in underserved areas.
NMTC Overview: Structure, Tax Credits, and Application/Award Process
The NMTC program is structured to attract private capital by offering a 39% tax credit over seven years (5% for the first three years and 6% for the remaining four years). The tax credits are allocated by the Community Development Financial Institutions (CDFI) Fund, a division of the U.S. Department of the Treasury.
Structure
- Community Development Entities (CDEs): Organizations that receive allocations of NMTCs. CDEs are responsible for selecting and investing in qualified businesses and projects in low-income community development.
- Qualified Active Low-Income Community Businesses (QALICBs): Businesses and projects that receive investments from CDEs.
- Qualified Low-Income Community Investments (QLICIs): Investments made by CDEs into QALICBs.
Tax Credits
The New Market Tax Credit program offers a significant incentive for investors. For every $1 of investment, investors receive a 39% tax credit, claimed over a seven-year period.
Application/Award Process
- Application: CDEs apply to the CDFI Fund for NMTC allocation authority.
- Award: The CDFI Fund evaluates applications and awards NMTC allocations to selected CDEs.
- Investment: CDEs use the NMTC allocations to attract private investment and provide financing to QALICBs.
Claiming the Credits
Investors claim the NMTC over a seven-year period. The credit amount is 5% of the total investment for the first three years and 6% for the remaining four years. This staggered schedule encourages long-term investments in low-income communities.
The Leverage Structure
One common method to maximize the NMTC benefit is the leverage structure. In this arrangement, multiple sources of funding (equity, loans, etc.) are combined to enhance the amount of investment that qualifies for the tax credit. This structure can significantly amplify the impact of the NMTC by increasing the total investment in a QALICB.
Allocation Application and Rounds
The CDFI Fund periodically opens rounds for CDEs to apply for NMTC allocations. These rounds are highly competitive, and CDEs must demonstrate their ability to deploy the credits effectively and achieve significant community impact.
Community Development Entities (CDEs)
CDEs play a crucial role in the NMTC program. They are responsible for:
- Service Areas: Identifying and serving specific low-income communities.
- Governing/Advisory Boards: Ensuring community representation and input in decision-making processes.
Qualified Active Low-Income Community Businesses (QALICBs)
QALICBs are the ultimate beneficiaries of NMTC investments. To qualify, a business or project must meet certain criteria, such as being located in a low-income community and generating substantial community benefits.
Qualified Low-Income Community Investments (QLICIs) and the Sub-All Test
QLICIs are the actual investments made by CDEs into QALICBs. To qualify, these investments must meet the “substantially-all” test, meaning that a significant portion of the investment must be used in low-income communities or for the benefit of low-income persons.
Avoiding Credit Recapture
To prevent credit recapture, which would negate the NMTC benefits, investments must adhere to several requirements:
- Compliance: Maintaining compliance with NMTC regulations throughout the seven-year credit period.
- Reporting: Regular reporting to the CDFI Fund and ensuring that QALICBs continue to meet qualification criteria.
Conclusion
By understanding the intricacies of the New Markets Tax Credit program, investors, CDEs, and QALICBs can work together to drive meaningful economic development in communities that need it most. The NMTC program is a powerful tool for fostering growth, creating jobs, and improving the quality of life in economically distressed areas across the United States.
