The New Markets Tax Credit (NMTC) program provides tax incentives to investors through federal tax credits to promote investments in distressed communities nationwide. Complex issues can arise when utilizing this program, as it has many requirements that applicants and investors must understand and follow to remain eligible for its benefits. As a result, you must become familiar with the lexicon used in the NMTC program and the common acronyms used for different pieces of the program.
First, the Community Development Financial Institutions (CDFI) Fund is a division of the U.S. Department of Treasury. The CDFI Fund administers the NMTC program. Part of its duties is to certify entities as qualified community development entities or CDEs to participate in the NMTC program. Qualified CDEs can be any domestic corporation, partnership, or limited liability company (LLC) that meets the following criteria:
- Its primary mission is to serve or provide investment capital for low-income communities or low-income persons;
- It maintains accountability to residents of low-income communities through their representation on any governing board of or advisory board to the entity; and
- The CDFI Fund certifies the entity as a CDE.
Next, the CDE must seek taxpayers to make qualifying equity investments or QEIs in the CDE. A QEI is any equity investment in a CDE if:
- It is acquired by the investor at its original issue solely in exchange for cash;
- Substantially all the cash is used by the CDE to make qualified low-income community investments; and
- The CDE designates the investment as a QEI.
An investment that a CDE makes is a qualified low-income community investment or QLICI if it is:
- Any capital or equity investment in, or loan to, any qualified active low-income community business;
- The purchase from a CDE or any loan made by such entity that is a qualified low-income community investment;
- Financial counseling and other services to businesses located in and residents of low-income communities; and
- Any equity investment in, or loan to, any CDE.
A qualified active low-income community business or QALICB is any corporation or partnership if, for any taxable year, meets the following criteria:
- At least 50 percent of the total gross income of such entity is derived from the active conduct of a qualified business within any low-income community;
- A substantial portion of the use of the tangible property of such entity (whether owned or leased) is within any low-income community;
- A substantial portion of the services performed for such entity by its employees are performed in any low-income community;
- Less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity is attributable to collectibles (as defined in IRC §408 (m)(2)) other than collectibles that are held primarily for sale to customers in the ordinary course of such business; and
- Less than 5 percent of the average of the aggregate unadjusted bases of the property of such entity (as defined in IRC §1397C(e)) is attributable to nonqualified financial property.
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We are experienced in using New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, Historic Tax Credits, and other investment options to help developers, investors, nonprofit organizations, and entrepreneurs change their communities. Our unique qualifications allow us to devise unique plans to carry out your objectives and work toward improving your communities. You can get started today by contacting our offices at 215.880.9441 in Philadelphia or 202.817.3941 in Washington D.C. Set up a session with us to discuss your ideas and learn more about the opportunities that may be available to you. You can also find Savage & Associates online 24 hours a day, seven days a week, for more information about our services.