Global Tax Insights
Is Your Business Eligible for the New Markets Tax Credit Program?December 02, 2013
Expanding to underserved communities can create new opportunities for your business.
Expanding into underserved communities serves a dual goal of strengthening corporate bottom lines by penetrating new markets, while also helping to boost economic development in distressed neighborhoods. In recognition of the various benefits companies can provide when they develop operations in these areas, the government instituted a program in 2000 designed to spark more private sector investment in low-income communities.
The New Markets Tax Credit Program operates by allowing individual and corporate investors to receive a tax credit against their federal income tax returns for making equity investments in specialized financial institutions, called Community Development Entities.
Through the Community Development Financial Institutions Fund, which directly administers the program, CDEs have been allocated $36.5 billion in tax credit authority, but the application process can be competitive. An investor who qualifies for the program receives a tax credit equal to 39 percent of the total qualified equity investment made in a CDE. However, the credit is extended over a seven-year period, 5 percent annually for the first three years and 6 percent in the remaining four. Individual or corporate investors that redeem a NMTC investment before the seven-year term has run its course will forfeit the credit and interest will be assessed.
In order to qualify for the NMTC program, corporations must be “certified” as a CDE. Each of the following guidelines must be met to attain this classification:
• Be a domestic corporation or partnership at the time of the certification application
• Demonstrate a primary mission of serving, or providing investment capital for, low-income rural or urban communities or low-income persons
• Offer representation on a governing board of or advisory board to the entity to provide visibility and accountability to residents of low-income communities
Applicants will also need to contact the Internal Revenue Service to determine whether new projects are located in low-income communities that qualify for the tax credit.
What qualifies as a ‘low-income’ community
There are several benchmarks that must be met in order for corporations and private investors to begin projects in eligible urban areas or rural communities. Before launching an investment to claim the credit, companies should examine the census tract in the site location to ensure the following criteria are met relative to the statewide metropolitan medians:
• Poverty rate at least 20 percent, or
• Median family income at or below 80 percent
• Further, preference will be given to borrowers in non-metropolitan counties or in census tracts with unemployment either at or exceeding 1.5 times the national average
If these criteria are met, investors should move on to the next stage to ensure that the projects they plan to launch will also be approved with regard to the credit. For instance, capital expenditures for operating companies - such as real estate loans for acquisition, new construction, substantial rehabilitation, or machinery and equipment loans - commonly fall under the parameters of the credit.
In addition, launching real estate developments - including industrial, commercial (office and retail) and mixed-use - are also valid. However, funding is not available for real estate funds containing residential development housing available for purchase. Areas where residential rental income may exceed 80 percent of gross rental income or in which Low-Income Housing Tax Credits are used will not be eligible for funding.
Competing with other applicants
Because the credit can provide a great deal of value to corporate investors, competition to secure an award is fierce. It’s important to note that preference is often given to projects that fall in line with the below criteria:
• Total costs for development range between $5 million and $25 million
• Projects more likely to stimulate job creation or preserve jobs within the community
• Project readiness has been demonstrated and all construction loan and project financing has been completed or near completion