New Market Tax Credits
Part of the Community Renewal Tax Relief Act of 2000, the New Markets Tax Credit Program will spur approximately $15 billion in investments into privately managed investment institutions. In turn, these privately managed investment institutions, or Community Development Entities (CDEs), will make loans and capital investments in businesses in underserved areas. By making an investment in a CDE, an individual or corporate investor can receive a tax credit worth 39 percent (30 percent net present value) of the initial investment, distributed over 7 years, along with any anticipated return on their investment in the CDE.
The NMTC Program permits taxpayers to claim a credit against Federal income taxes for Qualified Equity Investments (QEIs) made to acquire stock or a capital interest in designated Community Development Entities (CDEs). These designated CDEs must use substantially all (defined as 85 percent) of these proceeds to make Qualified Low-Income Community Investments (QLICIs).
The investor, or a subsequent purchaser, is provided with a tax credit claimed over seven years. The investor receives a tax credit equal to five percent of the total amount paid for the capital interest or stock purchase over the first 3 years. For the final four years, the value of the tax credit is six percent annually.
The Community Development Financial Institutions Fund (CDFI Fund) certifies CDEs on an ongoing basis, and allocates NMTC Allocations annually to select CDEs through a competitive application process.
The CDFI Fund has the following requirements for qualification as a CDE. A CDE is any duly organized entity treated as a domestic corporation or partnership for federal income tax purposes that: (a) has a primary mission of serving, or providing investment capital for, low-income communities or low-income persons; (b) maintains accountability to residents of low-income communities through their representation on any governing board of the entity or any advisory board to the entity; and (c) has been certified as a CDE by the CDFI Fund of the US Department of Treasury.
In certain circumstances, NMTC may be used to finance mixed-use projects, where less than 80% of the gross rental income comes from dwelling units. In cases such as this, the Low-Income Housing Tax Credits and New Markets Tax Credits may NOT be used to subsidize the same square foot.
NMTC funds may be used to finance businesses that purchase, rehab and sell single family homes by investing in businesses that are involved in affordable housing.
Novogradac & Company
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