New Markets Tax Credit Program

The New Markets Tax Credit (NMTC) Program incentivizes business and real estate investment in low-income communities of the United States via a federal tax credit. The program is administered by the US Treasury Department's Community Development Financial Institutions (CDFI) Fund and allocated by local Community Development Entities (CDEs) across the United States.

History

The New Markets Tax Credit Program was established as part of the Community Renewal Tax Relief Act of 2000. The goal of the program is to spur revitalization efforts of low-income and impoverished communities across the United States and Territories. The NMTC Program provides tax credit incentives to investors for equity investments in certified Community Development Entities, which invest in low-income communities.[1] The credit equals 39% of the investment paid out (5% in each of the first three years, then 6% in the final four years, for a total of 39%) over seven years (more accurately, six years and one day of the seventh year) . A Community Development Entity must have a primary mission of investing in low-income communities and persons.[2]

The concept behind the NMTC emerged in the late 1990s, when numerous foundations and think tanks were working to popularize the idea of using business-oriented mechanisms to help disadvantaged communities increase wealth and jobs. For example, business, community, academic, and public sector participants at the 1997 American Assembly meeting issued a report urging business leaders to reinvest in urban areas in the U.S. The final report also pushed nonprofit and government officials to help lead this new effort to open untapped markets through a fostering of “community capitalism.” It defined community capitalism as a “for-profit, business-driven expansion of investment, job creation, and economic opportunities in distressed communities, with government and the community sectors playing key supportive roles.” To accomplish this revival, participants called for improving access to capital (especially through equity investment) and ensuring greater technical assistance for businesses. These were seen as the two key ways of “energizing community capitalism in distressed areas”. The report set out crucial components of the future New Markets initiative. The American Assembly disseminated the final report widely, including sending it to the White House and Congress. Vice President Al Gore, in support of the conference conclusions, stated that, “The greatest untapped markets In the world are right here at home, in our distressed communities.”

Overview

The Community Development Financial Institutions (CDFI) Fund in the Department of the Treasury has been authorized to administer the program. Community Development Entities (CDEs) apply to the CDFI Fund each year not for tax credits directly, but for an award of "allocation authority"—that is, the authority to raise a certain amount of capital, or Qualified Equity Investments (QEIs) from investors. In the first year of the program (2001), the CDFI Fund awarded $1 billion in allocation authority to CDEs, enabling those CDEs to raise $1 billion in QEIs from investors, which enabled those investors to reduce their federal tax liability by $390 million (or 39% of the amount they invested in the CDEs) over seven years. For the investors to be able to claim the credits over the seven-year compliance period, the CDEs must use "substantially all" ("Sub All") of the QEIs from investors to make Qualified Low Income Community Investments (QLICIs) in Qualified Active Low Income Community Businesses (QALICBs) located in Low Income Communities (LICs). (Each of the previous terms—CDE, QEI, "Substantially All," QLICI, QALICB, and LIC—are defined in the Internal Revenue Code and other federal guidance.)

Allocation Rounds

Through 2010, there have been eight NMTC allocation rounds.[3] Allocation awards for a prior round are typically made within the first quarter of the calendar year after a round. In the eighth round (2010), the CDFI fund awarded the $3.5 billion allocation authority pool (which would generate $1.365B in tax credits for investors; $3.5B x 39% = $1.365B) to 99 CDEs out of a pool of 250 applicants, who had requested allocations totaling $23.5 billion.[4]

Round Year(s) Total Allocation
1 2001–2002 $2,491,000,000
2 2003–2004 $3,500,000,000
3 2005 $2,000,000,000
4 2006 $4,100,000,000
5 2007 $3,909,000,000
6 2008 $5,000,000,000
7 2009 $5,000,000,000
8 2010 $3,500,000,000
9 2011 $3,600,000,000
10 2012 $3,500,000,000
11 2013 $3,500,000,000
12 2014 $3,500,000,000
13 2015-2016 $7,000,000,000
Total $50,500,000,000

Terms

CDEs

From the CDFI Fund website:[5]

A CDE, or Community Development Entity, is a domestic corporation or partnership that is an intermediary vehicle for the provision of loans, investments, or financial counseling in Low-Income Communities (LICs). Benefits of being certified as a CDE include being able to apply to the CDFI Fund to receive a New Markets Tax Credit (NMTC) allocation to offer its investors in exchange for equity investments in the CDE and/or its subsidiaries; or to receive loans or investments from other CDEs that have received NMTC allocations.
To become certified as a CDE, an organization must submit a CDE Certification Application to the Fund for review. The application must demonstrate that the applicant meets each of the following requirements to become certified:
  • Be a legal entity at the time of application;
  • Have a primary mission of serving LICs; and
  • Maintain accountability to the residents of its targeted LICs.

QEIs

A QEI is a Qualified Equity Investment.[6] An investor with a QEI is entitled to claim the NMTC, if a credit allowance date occurs during the investor’s taxable year. For each equity investment in the CDE, examiners should determine whether the investment is a QEI for purposes of IRC §45D.

QLICI

A QLICI [6] is a Qualified Low-Income Community Investment. The CDE must invest the QEIs in QLICIs. The investments can be:

  • A capital or equity investment in, or loan to, any qualified active low-income community business.
  • The purchase from another CDE of any loan that was a QLICI either at the time the loan was made or at the time the CDE purchases it. It is not necessary for the CDE from which the loan is purchased to have received an NMTC allocation. See Treas. Reg. §1.45D-1(d)(1)(ii)(B) if the original loan was made before the CDE was certified. See Treas. Reg. §1.45D-1(d)(ii)(1)(C) regarding multiple purchases of a loan, and Treas. Reg. §1.45D-1(d)(1)(ii)(D) for examples.
  • Providing financial counseling or other services to qualified active low-income community businesses located in, or residents of, a low-income community.
  • An equity investment in, or loan to, another CDE, but only to the extent that the second, third or fourth CDE uses the investment or loan to make a QLICI. See Treas. Reg. §1.45D-1(d)(1)(iv) for complete discussion and examples of investments by CDEs in other CDEs.

QALICB

QALICB [7] is a Qualified Active Low-Income Community Business. QALICBs are any for-profit or non-profit corporation or partnership if;

i. At least 50% of the total gross income of that business is derived from the active conduct of its business within any QLIC,
ii. A substantial portion (defined as at least 40%) of the use of the tangible property of that business (whether owned or leased) is within any QLIC,
iii. substantial portion (defined as at least 40%) of the services performed by that business' employees are performed in any QLIC; the business is not primarily holding collectibles.
iv. If (ii) or (iii) are 50% or more than (i) is deemed to have been met.
v. Less than 5% of the property is attributable to collectables (e.g. art and antiques), other than those held for sale in the ordinary course of business or is attributable to nonqualified financial property (e.g. debt instruments with term in excess of 18 months).

LIC

Low Income community (LIC) [7] is any population census tract that meets one of the following criteria (as reported in the most recently completed decennial census published by the U.S. Bureau of the Census):

  • i The poverty rate for such census tract is at least 20%; or
  • ii The Median Family Income (MFI) of such census tract does not exceed 80% of: (a) The statewide MFI, if the tract is not located within a metropolitan area, or (b) The greater of statewide MFI or the metropolitan area MFI, if the tract is located within a metropolitan area.

Status of the Program in the Internal Revenue Code

The New Markets Tax Credit is outlined in Section 45D of the Internal Revenue Code. Unlike many other tax credit programs (such as the Low-Income Housing Tax Credit Program, which was made a permanent part of the Internal Revenue Code in 1993 under the Clinton administration), as a non-permanent program, the New Markets Tax Credit has required renewal during each session of Congress. Most recently, the New Markets Tax Credit program was extended as part of Section 733 of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.[8]

The NMTC program expired on December 31, 2011, along with several dozen of the so-called "tax extenders".[9] It was retroactively renewed in H.R. 8, the American Taxpayer Relief Act of 2012 for another 2 years until January 2014.[10]

U.S. Senators Jay Rockefeller (D-West Virginia) and Roy Blunt (R-Missouri) introduced S.B. 1133, "New Markets Tax Credit Extension Act of 2013" in June 2013 to permanently add New Market Tax Credits to the Internal Revenue Code, however the program expired in January 2014 without the bill's passing.[11][12]

See also

Notes

^ Brief Overview of NMTC Program

  1. ↑ Fiore, Nicholas (August 2001). "The Community Renewal Tax Relief Act of 2000: New incentives for taxpayers investing in distressed communities". Journal of Accountancy. Retrieved 19 September 2013.
  2. ↑ US Department of Treasury: Community Development Financial Institutions Fund..
  3. ↑ CDFI Fund
  4. ↑ CDFI Fund
  5. ↑ CDFI
  6. 1 2 https://www.irs.gov/pub/irs-utl/atgnmtc.pdf
  7. 1 2 http://www.financefund.org/pdfs/NMLpolicy.pdf
  8. ↑ NOVOCO
  9. ↑ http://www.independentsector.org/uploads/Policy_PDFs/x-6-12.pdf
  10. ↑ http://www.govtrack.us/congress/bills/112/hr8/text
  11. ↑ Bradley, Bill. "New Market Tax Credits Set to Expire". Retrieved 24 February 2014.
  12. ↑ https://www.govtrack.us/congress/bills/113/s1133/text
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