Investing and the New Markets Tax Credit

By December 1, 2020Tax Credits, Tax Incentives
new markets tax credit

Traditionally, the New Markets Tax Credit was claimed by investors comprised of large corporations or financial institutions. It is possible, however, for individuals, and even the Community Development Entities (CDEs), to invest themselves. Investor capital reaches financially distressed areas via the qualified CDEs in that locale.

The New Markets Tax Credit Encourages Economic Growth

A business or entity applies with the Community Development Financial Institutions Fund (CDFI) to become a certified Community Development Entity (CDE). Once this is achieved, the CDE can apply for tax credits with the Department of the Treasury. The Community Development Financial Institutions Fund is a bureau in the Treasury Department. This bureau oversees the allocation of the NMTC. There are several steps to becoming a certified CDE, but your business or institution may already qualify.

Many financial institutions and businesses are already certified CDFIs or SBICs. These two designations automatically qualify such companies and institutions as CDEs. Community Development Financial Institutions are usually community credit unions or banks. They are already helping provide access to lending for underserved communities. Specialized Small Business Investment Companies are companies designed to increase small businesses’ access to investment in low-income areas, which is also the aim of the NMTC.

Once the CDE has applied for credit with the U.S. Treasury, they can align investors with business projects in their community. The capital is invested in the CDE in exchange for the NMTC which the investor can claim against their federal income tax owed. Private entity CDEs efficiently and fairly extend this funding and recruit investment to meet the needs of the qualifying projects they choose within their communities. The recipients of the funding are designated as Qualifying Active Low Income Community Businesses or QALICBs.

Changes to the New Markets Tax Credit (NMTC)

The most recent change to the NMTC came in December 2019. Through the Fiscal Year 2020 appropriations bill H.R. 1865, President Trump signed into law a $5 billion extension of the NMTC. Designed as a one-year extension, it was a prescient move for the President. Businesses and communities were hit hard by the Coronavirus pandemic that came with the new year.

According to the New Markets Tax Credit Evaluation, investors are able to claim up to 39% income tax credit on their investment. $12.9 billion dollars were allocated in 9 rounds, over the first eight years of the program. This equals out to about $1.5 billion per allocation round. The recent extension will significantly increase that allocation amount at a time when communities and QALICBs need it most. 

Paul Anderson, of the NMTC Coalition, reported that funding for 2019 was $3.5 billion. As the program has continued to receive extensions, the allocation amount has increased. Many businesses and projects are in dire need of funds. Certain changes made to the NMTC Compliance FAQs were made in response to the Coronavirus pandemic.

Communities Become Candidates

The United States Census determines in large part which communities can qualify to receive NMTC qualifying investments.  Communities are judged to be qualifying investment opportunities by census poverty level. Some communities qualify because of their status as a “targeted population.” A population can receive this designation because of natural disaster as was the case with Hurricane Katrina and the subsequent Gulf Opportunity Zones

The New Markets Tax Credit intends to help underserved communities, devastated communities, and investors simultaneously. In 2004, the American Jobs Creation Act defined targeted populations in Subtitle C: Community Revitalization. It also set a precedent for identifying potential QALICBs, 

Americans have benefited from CDFI funding for almost two decades. In July 2020, the CDFI Fund awarded $3.5 billion in New Market Tax Credits. This amount brought the allocations awarded to a total of $61 billion. Contact us for more information on how your business can invest in America.