The New Markets Tax Credit (NMTC) and the Qualified Opportunity Zone (OZ) programs are federal tax incentive programs that focus on promoting private capital investment in distressed areas throughout the country. Each of these programs aims to improve economic conditions in historically low-income areas. Nonetheless, there are important differences in these programs that may make them better options for some situations than others.
The New Market Tax Credit (NMTC) Program
Investors benefit from the NMTC program by applying the tax credit to their annual federal income taxes. In addition, they receive a direct tax credit for seven years following the investment, which results in a total tax credit of 39% on the amount invested.
Investment projects must meet certain criteria to participate in the NMTC program, as follows:
- First, the investment project must be designated as NMTC-eligible within a qualified census tract. The more economically distressed the area is, the more likely the community development entity (CDE) will receive the tax credits.
- Additionally, investors must obtain the tax credits through a certified CDE. Due to this stipulation, investors cannot directly apply for the tax credits.
Furthermore, Congress must decide periodically to renew the NMTC, as it is not a permanent part of the Internal Revenue Code. As a result, investors cannot necessarily depend on the NMTC program for the long term, as it could expire at some point. Currently, the program is set to expire at the end of 2025.
The Opportunity Zone (OZ) Program
Unlike the NMTC Program, the OZ program is a permanent part of the Internal Revenue Code, so it is not subject to Congressional approval. Therefore, investors can rely on the program for federal tax incentives in the future.
The OZ program provides various tax benefits, including:
- Temporary deferral of previously earned capital gains by placing assets in Opportunity Funds, or corporations or partnerships organized to invest in Opportunity Zone property
- Capital gains placed in an Opportunity Fund for at least five years increase the basis in the investor’s original investment by 10%, or if for seven years, by 15%
- After ten years, any additional appreciation on the initial investment is tax-free
One eligibility criterion that differs significantly from the NMTC program is that only investors with a net worth of $1 million or more who meet certain guidelines can participate. The buy-in for OZ program participation is also high, typically requiring a minimum $100,000 investment.
Investors also may encounter certain risks with the OZ program that do not necessarily exist with the NMTC program. The OZ program model is still relatively untested, as it only launched in 2017 and has no established track record.
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