Credits Against Tax
On Dec. 5, 2011, the IRS published final regulations (T.D. 9560) relating to how an entity serving targeted populations can meet the requirements to be a qualified active low-income community business (QALICB) under the provisions of the new markets tax credit (NMTC) program. In addition, on May 1, 2012, the Community Development Financial Institutions (CDFI) Fund, the division of Treasury that oversees the NMTC program, announced that it completed the first stage of its transition to updated program eligibility based on new census data. Both of these recent changes were important steps in expanding the impact of the NMTC program, giving more businesses access to the “gap” financing provided by private investors under the program.
Note: The new markets tax credit expired at the end of 2011 (Sec. 45D(f)); however, the carryover period for unallocated credits runs through 2016 (Sec. 45D(f)(3)), and Congress is expected to renew the credit.
Background of the NMTC Program
The NMTC program was created in December 2000 by the Community Renewal Tax Relief Act of 2000, P.L. 106-554, to spur new or increased investments into operating businesses and real estate projects located in low-income communities throughout the United States and its territories. The NMTC program attracts investment capital to low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax return in exchange for making an equity investment in a specialized organization called a community development entity (CDE). The credit totals 39% of the original investment amount and is claimed over a period of seven years—5% for each of the first three years of the investment period, and 6% for each of the last four years of the investment period. If the investment in the CDE is redeemed before the end of the seven-year investment period, then 100% of the tax credit is subject to recapture.
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