New Market Tax Credit Incentives

Funding for investments in distressed communities received a boost 18 years ago when Congress enacted the New Markets Tax Credit (NMTC) program in late 2000. The program as received several extensions, most recently with the 2017 tax reform bill. Several states have added a state NMTC program.

Tax incentives are provided in the form of tax credits to investors who invest in the promotion economic improvements to disadvantaged communities through special purpose entities called CDE’s (Qualified Community Development Entities). The CDE applies for an annual federal award of NMTC through a competitive process and lengthy application through the US Treasury’s CDFI Fund. CDE’s seek out investors for their annual fund and then must invest substantially all of the funds (Qualified low-income community investments – QLICI) into the distressed community business (Qualified active low-income business – QALICB). The CDE uses its local knowledge and expertise to select which business to invest in, either through a loan or equity.

The taxpayer/investor receives a 39% credit over years seven years – 5% each of the first three years and 6% for the next four years. The legal structure of these investment activities is complex so experienced attorneys and accountants are needed to complete the documents and flow of funding.

Business investments that qualify for the program bring jobs to the disadvantaged community and could include small technology firms, shopping centers, manufacturers, retail stores, hotels, etc. Residential rental properties are excluded from the list of qualified businesses as well as “sin” businesses. Non-residential historic buildings using historic tax credits in distressed communities pair well with the NMTC.