What is NMTC?
The federal New Markets Tax Credit Program incentivizes community development and economic growth through the use of tax credits that attract private capital to distressed communities. Through a highly competitive allocation process, the U.S. Department of Treasury awards investment authority based on annual applications submitted by certified Community Development Entities (CDEs).
Over the years, a number of states have enacted state-level New Markets programs in an effort to increase the amount of private capital available for small businesses and entrepreneurs within their borders. Learn more about specific state New Markets programs.
How does NMTC Work?
New Markets Tax Credits attracts capital to low-income communities by providing private investors with a federal tax credit. Through a competitive application process, tax credits are allocated to Community Development Entities (CDEs), which are at the center of NMTC programs and their transactions.
If approved for a tax credit allocation, the CDE makes investments in businesses operating in economically-distressed areas. Each investment or loan is carefully distributed to projects that will positively impact the surrounding community.
In many cases, the businesses that are selected have raised part of the needed funds themselves but are unable to find private sector capital due to their location in a disadvantaged community. This leaves a financing gap that must be filled.
New Markets Tax Credit Program encourages investments in both urban and rural areas that have high unemployment and poverty rates. Investors often overlook these businesses due to their perceived high risk of investment. To offset potential risks, investors claim a tax credit worth 39% of the total Qualified Equity Investment (QEI) made in the original CDE equity stake. The credit is utilized over a seven-year period.
Any equity raised by a CDE through a NMTC award must be invested as loans or equity in a qualified low-income business and/or other CDEs.
Which States have or have had an State NMTC program?
Alabama, Arkansas, Florida, Illinois, Kentucky, Louisiana, Maine, Mississippi, Missouri, Nebraska, Nevada, Ohio, Oregon, Utah
What is the economic impact of NMTC?
In the program’s first 10 years, billions of dollars were invested in low-income communities, and thousands of new jobs were created. At the end of 2015, the NMTC program had:
• Generated $8 of private investment for every $1 of federal funding
• Created 164 million square feet of manufacturing, office, and retail space built
• Financed more than 4,700 businesses
Additionally, the NMTC program had created or retained 358,800 jobs between 2002 and 2013.
New Markets Job Act allocations have supported various industries, including manufacturing, food, retail, housing, health, technology, energy, education, and childcare. Because of these investments, economically-distressed communities have gained access to public facilities, goods, services, and additional job opportunities.
What makes a business qualified for a NMTC investment?
To be a Qualified Active Low-Income Community Business (QALICB) for a NMTC investment, a business must, at a minimum, be located in a designated low-income community. These communities have a poverty rate of at least 20% or a median family income that does not exceed 80% of the area median income.
Other qualifications focus on the business location. QALICBs must have:
• At least 50% of the QALICB’s revenue generated from activity performed at the subject location
• At least 40% of the QALICB’s tangible property located within the low-income community
• At least 40% of the QALICB’s services completed within a low-income community
• Rental or residential real estate income that does not account for more than 80% of the QALICB’s revenue.
Businesses may also qualify as a QALICB if they meet the “targeted populations” test for serving low-income individuals.
How does an organization become a CDE (Community Development Entity)?
There is no application deadline to receive a CDE certification. To become a certified CDE, an organization must submit a CDE certification application to the U.S. Treasury Department for review. The applicant must be a legal entity at the time of application, be dedicated to serving low-income communities (LICs), and maintain accountability to the residents of the LIC it’s serving. Once annually, CDEs apply to the U.S. Treasury Department for New Markets Tax Credit allocation.