The New Markets Tax Credit (NMTC) provides businesses across the United States with flexible financings based on various qualifying factors. Organizations can utilize the proceeds of NMTC financing to help finance an expansion or relocation, provide equipment financing, or provide working capital.
Explore some frequently asked questions related to the NMTC:
What’s the New Markets Tax Credit (NMTC)?
Passed in 2000 as part of the Community Renewal Tax Relief Act, the NMTC provides a 39% federal tax credit for investments in traditionally underserved, low-income communities. Since its inception, the NMTC has supported a wide range of businesses that range from childcare to technology, education to manufacturing, and beyond.
What’s the Economic Impact of the New Markets Tax Credit?
NMTCs are designed to facilitate investment in low-income communities. These communities, in turn, benefit in the form of jobs created or greater access to community goods and services.
The NMTC program has spurred more than $120 billion of investment to over 7,500 projects and created or retained over one million jobs. It has supported the construction of more than 56 million square feet of manufacturing space, 94 million square feet of office space, 67 million square feet of retail space, and provided numerous services to these traditionally underserved communities.
Other Community Development Funding
As communities develop and prosper, further investment and revitalization is spurred. Some qualified institutions and funds are detailed below.
What’s the Community Development Financial Institutions (CDFI) Fund?
The CDFI fund is a division of the US Treasury Department that seeks to promote economic revitalization and community development in low-income communities. As part of its mission, the CDFI fund is tasked with implementing the NMTC program and administers an annual allocation of tax credit authority to community development entities through a competitive application process.
What’s a Community Development Entity (CDE)?
Community Development Entities (CDEs) are financial intermediaries with a track record of making loans and investments in underserved areas. CDEs apply for an annual allocation of NMTCs from the CDFI fund to enable them to facilitate these investments that ultimately generate NMTCs, which are utilized by investors.
What’s a qualified equity investment (QEI)?
A QEI is an equity investment in a CDE provided that such investment is acquired by the investor in exchange for cash and substantially all of the cash is used by the CDE to make Qualified Low-Income Community Investments (QLICIs). The amount of the QEI is multiplied by 39% to determine the amount of NMTCs generated.
What’s a qualified low-income community investment (QLICI)?
A QLICI is either a loan or equity investment made by the CDE to a qualified active low-income community business (QALICB). QLICIs are predominately structured as interest only loans and are utilized by the QALICB to complete the project or underlying mission of the investment.
What’s a qualified active low-income community business (QALICB)?
The QALICB is the ultimate beneficiary of the NMTC financing. It is the business entity that will utilize the NMTC proceeds to complete the project that will ultimately benefit the low-income community.
What Projects Qualify for New Markets Tax Credit Financing?
Most businesses or not-for-profit organizations located in a qualified census tract or serving low-income persons could potentially qualify for NMTC financing.
Common transactions that are financed with NMTCs include:
- Commercial, office, industrial, and mixed-use real estate development
- Rehabilitation and expansion
- Community facilities
- Not-for-profit enterprises
- Equipment financing
- Tribal-owned developments
- Working capital
Some businesses that don’t typically qualify for NMTC financing include:
- Massage parlors
- Gaming facilities
- Liquor stores
- Tanning facilities
- Golf courses
- Some agricultural businesses
Where Must New Markets Tax Credit Projects Be Located?
In order to qualify for NMTC financing, a project must be located in a qualified low-income census tract or primarily serve low-income persons. Low-income persons for the purposes of NMTCs are defined as persons making less than 80% of the area’s median family income.
In addition, many CDEs place an emphasis on projects located in severely distressed census tracts. The CDFI Fund does have a mapping tool to help projects initially identify whether they are located in a qualified census tract. As many factors might also influence the ultimate ability to attract NMTC financing, consultation with a NMTC professional is advisable.
Do New Markets Tax Credits Differ from State to State?
The federal NMTC program offsets federal tax liability, so it’s structured identically across all 50 states and territories.
Some states have enacted or are considering NMTC programs. These programs typically mirror many of the provisions of the federal program, but each state program has its own nuances, so the programs requirements may vary from state to state.
What Are the Benefits of the New Markets Tax Credit?
NMTC financing is designed to be flexible and innovative. It is often structured in more favorable terms than traditional financing.
These terms can include:
- Low interest rates
- Higher loan-to-value ratios
- Lower debt service coverage ratios
- Longer maturity dates
- Subordinate or unsecured debt
Additionally, at the end of the seven-year compliance period, the remaining investor equity is typically forgiven, providing additional benefit to the project.
How Are New Markets Tax Credits Different from Opportunity Zones?
The NMTC program and the Opportunity Zone (OZ) program are both designed to drive investments to low-income communities, so the two programs have similar goals.
NMTCs generate tax credits, which can offset an investor’s tax liability. OZ investments allow an investor to defer taxation on capital gains, among other tax benefits, if the investment is held for a long enough period. While the two programs have the same goal of benefiting the low-income community, investor motivations are different for each program.
How Long Is the Compliance Period for New Markets Tax Credit Transactions?
The 39% tax credit generated by NMTC financing is claimed by investors over a seven-year compliance period.
During this time, NMTC projects must maintain compliance with the NMTC regulations. Common restrictions include, but are not limited to:
- Return of principal during the compliance period
- Hold fewer than 5% of assets as cash or cash equivalents
- Maintain operations within the tract during the compliance period
What Are the Benefits of the New Markets Tax Credit to the Investor?
In addition to reducing an investor’s tax liability, NMTC investments have other positive impacts. They help investors achieve their Environmental, Social and Governance (ESG) goals by promoting environmentally sustainable outcomes and social support for low-income individuals. NMTC transactions also qualify as Community Reinvestment Act (CRA) eligible investments and Public Welfare Investments (PWI).
We’re Here to Help
Organizations that aren’t exploring options for business tax credits could be missing out on opportunity. If you would like to explore the benefits of NMTCs for your organization or learn more about state and federal tax credits, contact your Moss Adams professional.