A foundational requirement of the New Markets Tax Credit (NMTC) program is that Community Development Entities (CDEs) use NMTC allocations to serve eligible Low-Income Communities (LICs). LICs can fall within any of the following three categories:
- High Out-Migration Rural County Census Tracts
- Low-Population / Empowerment Zone (EZ) Census Tracts
- Targeted Populations
The first two categories are based solely on geographical location. However, the third category, Targeted Populations, is based not on geographical location but income and access to loans and equity. More specifically, Targeted Populations consist of individuals, or an identifiable group of individuals, including an Indian tribe, who either are low-income persons or otherwise lack adequate access to loans or equity investments.
Categories of Eligible Targeted Populations
Under the NMTC program, there are two categories of eligible targeted populations, as follows:
- Low-Income Targeted Populations (LITPs) – LITPS are persons or groups of persons who are low-income, which means having an income, adjusted for family size, of no more than:
- 80% of the area median family income for metro areas; and
- The greater of 80% of the area median family income or 80% of the statewide non-metro area median family income for non-metro areas
- GO Zone Targeted Populations (GZTP) – GZTPs are persons or groups of persons who otherwise lack adequate access to loans or equity investment and are displaced from their principal residences and/or lost their principal source of employment as a result of Hurricane Katrina. To qualify under a GZTP, an individual’s principal residence or principal source of employment must have been located in a population census tract within the GO Zone that contains one or more areas designated by FEMA as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina.
Requirements for Businesses Serving Targeted Populations
IRS guidance outlines how CDEs can use NMTCs to serve Targeted Populations and thus qualify as Qualified Active Low-Income Community Businesses (QALICBs). Generally, the entity can satisfy the requirements if:
- at least 50% of its total gross income for any taxable year is derived from sales, rentals, services, or other transactions with members of the Targeted Population; or
- at least 40% of its employees are members of the Targeted Population; or
- members of the Targeted Population own at least 50% of the entity.
IRS guidance also provides for certain other limitations concerning entities that serve Targeted Populations, such as the following:
- LITPs – The QALICB must generally be located in a census tract where the median family income does not exceed 120% of the applicable area median family income. However, exceptions are provided for low-population census tracts in non-metropolitan areas and low-population census tracts zoned for commercial or industrial use.
- GZTPs – Only those CDEs with a significant mission of recovery and redevelopment in the GO Zone that received a special allocation of NMTCs pursuant to the GO Zone Act of 2005 may serve this population. Additionally:
- The QALICB must be located in a census tract within the GO Zone that contains one or more areas designated by FEMA as flooded, having sustained extensive damage, or having sustained catastrophic damage as a result of Hurricane Katrina;
- The QALICB must generally be located in a census tract for which the median family income does not exceed 200% of the applicable area median family income. However, exceptions are provided for low-population census tracts in non-metropolitan areas and low-population census tracts zoned for commercial or industrial use.
We Can Work Together to Develop Communities
Savage & Associates is an economic development law firm providing sophisticated legal and business advice to clients interested in making significant changes in their communities. We advise developers, investors, nonprofit organizations, entrepreneurs, and anyone looking to effectuate change. You can contact our offices by calling 215.880.9441 in Philadelphia or 202.817.3941 in Washington D.C. to discuss your ideas. You can also find Savage & Associates online 24 hours a day, seven days a week, to get more information about the innovative financial tools we can use to make your vision a reality. From New Markets Tax Credits to Historic Tax Credits, we can design the unique transaction best designed to achieve your objectives.