Summary of the New Markets Tax Credit
The New Markets Tax Credit (NMTC) is a federal program created under the Community Renewal Tax Act of 2000 to stimulate economic and community development in America’s low-income communities. The program, Section 45d of the Internal Revenue Code, provides investors with 7 years of federal tax credits for making investments in a wide range of businesses located in Low Income Communities. The tax credits result in a dollar-for-dollar reduction of the investor's federal tax liability.
The NMTC is administered by the Department of Treasury through the Community Development Financial Institutions Fund ("the CDFI Fund"). The CDFI Fund was originally responsible for administering $15 billion in tax credit authority over six years through a competitive process, including $2.5 billion in annual tax credits beginning in 2002 which increased to $3.5 billion in 2007. The program was later extended multiple times, most recently with the Emergency Economic Stabilization Act in 2008. The CDFI Fund is also responsible for certifying the entities that receive the NMTC and monitoring the ongoing compliance of these entities with the program requirements.
- have at least 50% of their total gross income derived from conducting a qualified business within a Low-Income Community,
- at least 40% of the use of the tangible personal property of the entity is within a Low Income Community,
- at least 40% of the services provided by the business’ employees are performed in a Low Income Community
- Less than 5% of the average of the aggregate unadjusted basis of the property of such entity is attributable to collectibles that are held primarily for sale to customers in the ordinary course of business
- Less than 5% of the entity’s business property is attributable to nonqualified activities.
The NMTC excludes specific activities under the definition of Qualified Active Low Income Community Businesses. For example, while the rental of substantially improved commercial real estate (i.e. office, retail, industrial, hotel) would qualify, residential rental property or single family residential mortgages would not qualify under the NMTC. Other ineligible businesses include golf courses, race tracks, gambling facilities and liquor stores.
Where the NMTC Can Be Used
A qualified Low Income Community includes those communities that have at least a 20% poverty rate or a median income of up to 80% of area or statewide median income. Those interested in determining whether a particular community qualifies as low income community under the NMTC program should visit the CDFI Funds website. Under certain circumstances the law provides an option, at the discretion of the Treasury Secretary, to approve communities that are within census tracks that otherwise do not meet the overall poverty or income tests, if there is a demonstrated lack of capital investment within such a community.
In summary, the NMTC is designed specifically to encourage the private sector to invest in America’s low-income communities. It is, by design, a very flexible program that will likely be a huge stimulus to economic and community development throughout the nation. Like its successful cousin, the low-income housing tax credit, the NMTC is not a direct government subsidy, but rather an incentive for the private sector to invest capital for the benefit of America’s disadvantaged communities. In this regard, it will be the private sector, through the application of prudent investment and due diligence practices and ongoing asset management oversight, that will be responsible for the ultimate success of the program.
Investing in the New Markets Tax Credit with WNC
WNC is proud to have been among the first of 66 awardees in the New Markets Tax Credit program. If you are a developer and are interested in obtaining financing for a project under the New Markets Tax Credit Program, please download our questionnaire. Completed questionnaires should be e-mailed to David Shafer.