New Markets Tax Credit Program

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The New Markets Tax Credit (NMTC) Program was established in 2000 as part of the Al Gore, in support of the conference conclusions, stated that, “The greatest untapped markets In the world are right here at home, in our distressed communities.”

Overview

The Community Development Financial Institutions (CDFI) Fund in the Department of the Treasury has been authorized to administer the program. Community Development Entities (CDEs) apply to the CDFI Fund each year not for tax credits directly, but for an award of "allocation authority"--that is, the authority to raise a certain amount of capital, or Qualified Equity Investments (QEIs) from investors. In the first year of the program (2001), the CDFI Fund awarded $1 billion in allocation authority to CDEs, enabling those CDEs to raise $1 billion in QEIs from investors, which enabled those investors to reduce their federal tax liability by $390 million (or 39% of the amount they invested in the CDEs) over seven years. For the investors to be able to claim the credits over the seven-year compliance period, the CDEs must use "substantially all" ("Sub All") of the QEIs from investors to make Qualified Low Income Community Investments (QLICIs) in Qualified Active Low Income Community Businesses (QALICBs) located in Low Income Communities (LICs). (Each of the previous terms--CDE, QEI, "Sub All," QLICI, QALICB, and LIC--are defined in the internal revenue code and other federal guidance.)

Allocation Rounds

Through 2010, there have been eight NMTC allocation rounds.^[2] Allocation awards for a prior round are typically made within the first quarter of the calendar year after a round. In the eighth round (2010), the CDFI fund awarded the $3.5 billion allocation authority pool (which would generate $1.365B in tax credits for investors; $3.5B x 39% = $1.365B) to 99 CDEs out of a pool of 250 applicants, who had requested allocations totaling $23.5 billion. ^[3]

Round	Year(s)	Total Allocation
1	2001-2002	$2,491,000,000
2	2003-2004	$3,500,000,000
3	2005	$2,000,000,000
4	2006	$4,100,000,000
5	2007	$3,909,000,000
6	2008	$5,000,000,000
7	2009	$5,000,000,000
8	2010	$3,500,000,000
	Total	$29,500,000,000

Terms

CDEs

From the CDFI Fund website^[4]:

A CDE is a domestic corporation or partnership that is an intermediary vehicle for the provision of loans, investments, or financial counseling in Low-Income Communities (LICs). Benefits of being certified as a CDE include being able to apply to the CDFI Fund to receive a New Markets Tax Credit (NMTC) allocation to offer its investors in exchange for equity investments in the CDE and/or its subsidiaries; or to receive loans or investments from other CDEs that have received NMTC allocations.

To become certified as a CDE, an organization must submit a CDE Certification Application to the Fund for review. The application must demonstrate that the applicant meets each of the following requirements to become certified:

• Be a legal entity at the time of application;
• Have a primary mission of serving LICs; and
• Maintain accountability to the residents of its targeted LICs.

QEIs

A QEI is a Qualified Equity Investment.

"Sub All"

QLICI

QALICB

LIC

Status of the Program in the internal revenue code

The New Markets Tax Credit is outlined in Section 45D of the internal revenue code. Unlike other tax credit programs (like the Low-Income Housing Tax Credit Program, which was made a permanent part of the internal revenue code in 1993 under the Clinton administration), as a non-permanent program, the New Markets Tax Credit has required renewal during each session of Congress. Most recently, the New Markets Tax Credit program was extended as part of Section 733 of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. ^[5]

Notes

1. ^ US Department of Treasury: Community Development Financial Institutions Fund..
2. ^ CDFI Fund
3. ^ CDFI Fund
4. ^ CDFI
5. ^ NOVOCO

External links

• CDFI Fund New Markets Tax Credit Program Page