Are you looking for an innovative way to finance your business? The New Markets Tax Credit (NMTC) program may be the answer you’ve been searching for. This tax credit program is a powerful tool that provides businesses with access to capital for investments in low-income communities.
At Creative Advising, we understand the complexities of the NMTC program and can help you navigate the application process. In this article, we will explain how the NMTC program works and how it can be distributed and applied.
The NMTC program is a federal program that provides tax credits to businesses that invest in low-income communities. The program is designed to stimulate economic growth in these areas by providing businesses with access to capital for investments. The program is administered by the U.S. Treasury Department and is available to businesses in all 50 states.
The NMTC program works by providing businesses with a federal tax credit for every dollar they invest in a low-income community. The credit is equal to 39 percent of the investment and is spread out over seven years. The credit is applied to the business’s federal income tax liability, reducing the amount of taxes owed.
The NMTC program is a great way to finance investments in low-income communities. It provides businesses with access to capital that can be used to create jobs, improve infrastructure, and increase economic development in these areas.
At Creative Advising, we can help you understand the NMTC program and navigate the application process. Our team of certified public accountants, tax strategists and professional bookkeepers can provide you with the guidance and expertise you need to make the most of this program. Contact us today to learn more about how the NMTC program can help your business.
Qualified Low-Income Community Investment (QLICI)
The Qualified Low-Income Community Investment (QLICI) is an incentive created by the US government to attract capital investments into economically distressed areas. QLICI provides federal income tax credits to investors in low-income communities. These credits can be used for up to seven years and applied up to 39 percent of an eligible investment, thus providing an attractive rate of return.
The New Markets Tax Credit (NMTC) is an example of this type of incentive. NMTC is designed to stimulate community development and economic growth in distressed communities by providing tax incentives to investors who make qualified investments. The credits are distributed by the Community Development Financial Institutions Fund (CDFI Fund) to Community Development Entities (CDEs). CDEs are financial institutions organized to benefit lower-income communities and distressed rural areas. These entities use the credits to attract private capital investments for projects with positive community effects such as job creation, education and healthcare.
The CDFI Fund distributes the credits among qualified CDEs in an annual competitive process. The allocation of credits is based on overall project merit and potential for creating positive economic effects in the targeted community. Investor requirements, such as the use of low-income housing, may be used to select projects to receive credits. Qualifying CDEs must meet certain requirements and are required to provide Investors with an NMTC compliance agreement and a monthly report. CDEs must also report to the IRS on an annual basis.
In short, the New Markets Tax Credit provides an incentive for investors to make investments in marginalized communities. By funding projects and activities that create economic growth and address the socio-economic disparities faced by these communities, the NMTC program makes strides towards eliminating poverty and increasing prosperity.
Allocation Process
The New Markets Tax Credit (NMTC) allocation process is designed to drive capital to businesses located in economically distressed communities. Allocations are made to CDEs (community development entities) on an annual basis, through a competitive application process. Allocations are based on the CDEs’ ability to demonstrate their commitment to deploying the tax credit funds in low-income communities. The allocation process can be complex, but it is essential for getting access to the New Markets Tax Credit program.
The US Treasury Department is responsible for the allocation of the NMTCs and sets aside an annual amount, typically between $3 billion and $5 billion, to be allocated. The competitive process has two components: a “pre-application phase” and an “application phase.” Pre-applications are evaluated based on factors such as capability, capacity, and past performance. Successful pre-applications are then invited to submit full applications. Once all applications are submitted, the Treasury Department conducts an extensive financial and technical evaluation of each applicant and then select finalists to be awarded an allocation. Once the selection is made, the Treasury Department announces the awards and provides successful applicants with the opportunity to commit to an allocation.
The New Markets Tax Credit has been a powerful tool for spurring investment in low-income communities. By leveraging public and private funds, it has helped create thousands of jobs and projects that might not have been possible without it. The allocation process is an important part of getting access to this vital program and is one of the most important steps in the process.
Investor Requirements
Over the past few years, the New Markets Tax Credit (NMTC) has created thousands of jobs, invested billions of dollars into new businesses, and helped revitalize low-income communities across the U.S. The NMTC program provides financial incentives in the form of federal tax credits to investors in qualifying projects—but who are eligible NMTC investors, and what requirements must they meet in order to participate?
Generally speaking, NMTC investors are publicly and privately owned businesses, qualified funds, or other entities that meet certain financial and legal requirements. Investors must have sufficient capital to fund the project, the ability to take full advantage of all NMTCs, and the willingness to sign a binding legal commitment to invest in an approved NMTC expenditure for at least a seven-year period.
Potential investors should also be aware that, although the NMTC expense itself does not have to be repaid, any loan taken out to finance construction or other major expenditures related to the NMTC project must typically be repaid over a certain period of time. Further, most NMTC transactions require the investors to maintain investment-grade credit ratings in order to participate in the program.
The NMTCs themselves are distributed and applied to projects in the form of Qualified Low-Income Community Investment (QLICI) and Non-Low-Income Community Investment (NICI). QLICIs are deferrable transactions such as construction projects, while NICIs are non-deferrable transactions, such as purchases of permanent real estate or equipment. In either case, the NMTC funds must be invested in an eligible community and used in a way that meets NMTC requirements.
For more information on investor requirements for NMTC investments, it is best to consult with a knowledgeable CPA or tax professional. At Creative Advising, our team of CPAs, bookkeepers, and tax strategies have the experience and expertise to help you maximize your NMTC investment opportunities.
Non-Low-Income Community Investment (NICI)
The New Markets Tax Credit (NMTC) program helps to incentivize private investors to use long-term equity investments in businesses and real estate projects located in low-income communities across the US for job creation and economic development. The NMTC program also allows investors to receive a federal tax credit based on also their investment. This credit can be taken over a period of seven years at a rate of 5 or 6 percent of the original investment, depending on the investment. The overall NMTC program involves several stages, such as a Qualified Low-Income Community Investment (QLICI) and Non-Low-Income Community Investment (NICI).
NICIs or non-low-income community investments are investments that are made into businesses or projects that are located in low-income communities, but the investments are used to benefit non-low-income communities. The NMTC program incentivizes this type of investing as it helps to stimulate economic development in non-low-income communities. This type of investing is sometimes referred to as “impact investing”, where investments are made into projects or businesses that have a positive social or environmental impact.
Distribution of the NMTC tax credit is based on the total investment amount made into the eligible projects or businesses in the form of an equity investment. In other words, the amount of credit received is based on the total investment amount of the respective investor. The credit is then distributed in two parts: the QLICI credit and the NICI credit.
As such, the New Markets Tax Credit can be applied in different ways, depending on the type of investment. For investments that are made into businesses or projects located in low-income areas, the credit can be taken over a period of seven years at a rate of 5 or 6 percent of the original investment amount. For investments that are made into businesses or projects located in non-low-income areas, the credit can be taken over a period of seven years at a rate of 5 or 6 percent of the original investment amount. Both of these credits can be a powerful tool for investors to spur economic development in low-income and non-low-income areas.
Reporting and Compliance Requirements
The New Markets Tax Credit (NMTC) program was established in 2000 to spur investment in disadvantaged communities. NMTCs are allocated by the U.S. Treasury Department to allocatees, who then issue the credits to investors. All NMTC investments are subject to certain reporting and compliance requirements. Allocatees must file an annual report with the Community Development Financial Institutions Fund (CDFI) that assesses the performance of each NMTC transaction and reports the allocation amount, the sponsor’s use of the allocation, and the type of business development activities with the credits.
The compliance requirements vary depending on when the NMTC investment was allocated, but in general there are two main types of compliance: Investment Zone Compliance and Substantial Ongoing Activity Compliance. The Investment Zone Compliance requires the investor and the business receiving the NMTC funding to be located within a designated “low-income” or “distressed” area. The Substantial Ongoing Activity Compliance requires that at least 35-50% of the capital raised through NMTCs be used for activities that benefit the qualifying areas.
The durability requirements of a NMTC transaction are kept in place for a minimum of seven years, and the allocatees are responsible for ensuring that both the investment zone and substantial activity compliance requirements are still met each year. If the allocatee fails to meet these requirements, they could face significant penalties, including the recapture of all or a portion of the allocated NMTCs. Additionally, CDFI may remove an allocatee’s authority to make additional investments if they fail to maintain reporting and compliance standards.
These reporting and compliance requirements are essential for ensuring that NMTCs are used for the purpose of promoting economic development and investment in the low-income and distressed areas for which they were intended. It is important that all NMTC investors maintain these requirements, and by adhering to the responsible use of the NMTCs, allocatees can ensure that these resources benefit these communities long into the future.
“The information provided in this article should not be considered as professional tax advice. It is intended for informational purposes only and should not be relied upon as a substitute for consulting with a qualified tax professional or conducting thorough research on the latest tax laws and regulations applicable to your specific circumstances.
Furthermore, due to the dynamic nature of tax-related topics, the information presented in this article may not reflect the most current tax laws, rulings, or interpretations. It is always recommended to verify any tax-related information with official government sources or seek advice from a qualified tax professional before making any decisions or taking action.
The author, publisher, and AI model provider do not assume any responsibility or liability for the accuracy, completeness, or reliability of the information contained in this article. By reading this article, you acknowledge that any reliance on the information provided is at your own risk, and you agree to hold the author, publisher, and AI model provider harmless from any damages or losses resulting from the use of this information.
Please consult with a qualified tax professional or relevant authorities for specific advice tailored to your individual circumstances and to ensure compliance with the most current tax laws and regulations in your jurisdiction.”
