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New Market Credits
Community Renewal 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 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.
How Are New Market Credits Used?
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.
How Are New Market Credits Distributed?
The tax credits are distributed during a seven-year period and total 39% of the debt or equity investment consisting of 5% percent in the first three years and 6% in the next four years.
What Are New Market Credits Worth?
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.
How Do I Qualify For New Market Credits?
In order to qualify for the new markets tax credits, an investment must be made to either a business or a non-residential, commercial property that is located in a low-income community through a community development entity (CDE).
What Are Tax Credits Use Restrictions?
Because the Internal Revenue Code's Passive Activity Rules and Alternative Minimum Tax Regulations limit and, sometimes, prohibit the use of tax credits by individuals, most building owners syndicate the tax credits to a third-party corporate investor.
What Is A CDE?
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 has a primary mission of serving, or providing investment capital for, low-income communities or low-income persons; 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 has been certified as a CDE by the CDFI Fund of the United States Department of Treasury.
How Do CDEs Obtain New Market Credits?
Qualified CDEs apply to the Community Development Financial Institutions Fund (CDFI), a branch of the U.S. Department of the Treasury, for tax credit allocations that are awarded annually through a competitive application process. If selected, a CDE has a five-year time limitation in order to utilize the new markets tax credit allocation.


 
 
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