New Market Tax Credits

On the last day of its 2000 session, Congress created the New Markets Tax Credit program, part of the Community Renewal Tax Relief Act of 2000, to encourage investment in low-income communities. The program is designed to generate $15 billion in new private sector investments in low-income communities.

Qualified Community Development Entities (CDE) will apply to the CDFI Fund for an award of new markets tax credits. The CDE will then seek taxpayers to make Qualifying Equity Investments in the CDE. The CDE will in turn be required to use substantially all of the qualifying equity investments to make qualified low-income community investments (QLICI) in/to qualified active low-income businesses (QALICBs) located in low-income communities. The taxpayer will be eligible to claim a tax credit equal to 5 percent of its equity investment in the CDE for each of the first three years and a 6 percent credit for each of the next four years (39 percent total).

The program is designed to allow the CDE to use its local knowledge and expertise to decide what business to invest in or lend to with the funds it raises with the new markets tax credit. Most businesses located in low-income communities could qualify for loans or equity. Typical firms could include: small technology firms, inner-city shopping centers, manufacturers, retail stores or micro-entrepreneurs. Residential rental property does not qualify as a qualified active low-income business.

This is an exciting program that provides tax incentives to investors to make investments in distressed communities and promotes economic improvements through the development of successful business in these communities. However, complex issues can arise when using this innovation program, as such, it is important to consult with a tax advisor when getting into this area.