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New Markets Tax Credits

In December 2000, the U.S. Congress passed the Community Renewal Tax Relief Act, creating what has come to be known as the New Markets Tax Credit (NMTC) Program. This program is designed to encourage investments in qualified low income communities that traditionally have had poor access to both debt and equity capital.

Under the NMTC program, investors receive a federal income tax credit for making qualified equity investments in designated Community Development Entities (CDEs). In return, the qualified equity investments must be used by the CDE to provide investments in low income communities. Qualified Low Income Community Investments (QLICIs) include for-sale housing, businesses (except for golf courses, race tracks, gambling facilities and liquor stores), and real estate projects (except for rental residential properties that derive 80% or more of income from residential units) that are located in low income communities.

As a dollar-for-dollar reduction in federal income tax liability, the new markets tax credits are based on the amount of debt or equity investment that is made by the investor who will use the tax credit. The tax credits are taken during a seven-year period and total 39% of the investment amount consisting of 5% percent in the first three years and 6% in the next four years. This simply means that for every million dollars invested, the investor will receive a bottom line tax credit of $50,000 per year for three years and $60,000 per year for the next four years totaling $390,000 in tax credits during the seven-year period. Investors may not redeem their investments in CDEs prior to the conclusion of the seven-year period.

CDEs apply to the Community Development Financial Institutions Fund, a branch of the U.S. Department of the Treasury, for tax credit allocations that are awarded annually through a competitive application process. If awarded an allocation, a CDE has a five-year time limitation for converting the tax credits into equity dollars that then must be invested into low income communities within 12 months.

 

 

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