AndreTaxCo, PLLC

Background 

 

The New Markets Tax Credit (NMTC) Program, enacted by Congress as part of the Community Renewal Tax Relief Act of 2000, is incorporated as section 26 U.S.C. §45D, of the Internal Revenue Code (IRC). The American Jobs Creation Act of 2004 amended § 45D(e)(2) to allow investments benefiting “targeted populations,” later implemented in final regulations (T.D. 9560). T.D. 9560, 76 Fed. Reg. 75,774 (Dec. 5, 2011).  

 

Subsequent legislation extended and funded the NMTC through 2025, and U.S. Treasury Department's Community Development Financial Institutions Fund (CDFI Fund) recently released the “notice of allocation availability” (NOAA). The CDFI Fund (Nov. 19, 2024) opened a combined CY 2024–2025 allocation round with $10  billion in allocation authority. 

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The NMTC Program is jointly administered by the Community Development Financial Institutions (CDFI) Fund and the Internal Revenue Service (IRS). See CDFI Fund, “Introduction to the NMTC Program.” Investments made through the NMTC Program must comply with regulations outlined in § 45D and the implementing regulations at Treas. Reg. § 1.45D‑1. 

 

NMTCs provide a credit against federal income taxes for investors that make Qualified Equity Investments (QEIs) in certified financial intermediaries called Community Development Entities (CDEs), which use the proceeds to make Qualified Low‑Income Community Investments (QLICIs) in Low‑Income Communities (LICs). See § 45D(a)–(d).

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How the Credit Works

A taxpayer holding a QEI on a credit allowance date may claim a credit equal to 5% of the original QEI in each of the first three years and 6% in each of the last four years (39% total over seven years). QEIs are equity investments acquired at original issue for cash, designated by the CDE as QEIs, with substantially all of the cash used for QLICIs (safe‑harbor 85%). The amount paid at original issue includes all amounts paid to or on behalf of the CDE (including underwriter fees).

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What Counts as a QLICI

QLICIs include loans or equity to QALICBs, loan purchases from other CDEs, financial counseling/services to LIC businesses/residents, and investments in/loans to other CDEs (subject to look‑through rules). CDEs generally must deploy within 12 months and reinvest certain receipts by the end of the following year to maintain the substantially‑all requirement. Reserves up to 5% for loan losses or additional QLICIs may be treated as invested.

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Low‑Income Communities and Targeted Populations

A census tract is an LIC if it meets poverty (≥ 20%) or income (≤ 80% of area/state MFI) thresholds, with special rules for possessions, empowerment zones, and high‑migration rural counties. Targeted populations rules (for serving low‑income individuals/groups) were finalized in T.D. 9560, following interim reliance on Notice 2006‑60. 

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Recapture & Anti‑Abuse

Credits are recaptured if the CDE ceases to qualify, the substantially‑all test fails (and is not cured within the one‑time six‑month window), or the investment is redeemed/cashed out. The Commissioner may also treat transactions as recapture events under anti‑abuse authority where a principal purpose is inconsistent with § 45D.

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New Market Tax Credit (NMTC): Summary Highlights

• § 45D(a)(1)–(3) establishes the 39% credit with 5%/6% annual phases over seven years, contingent on holding a QEI on each credit allowance date. 

• § 45D(b) defines QEIs and caps a CDE’s designated QEIs at the allocation it received under § 45D(f). 

• QEIs must remain outstanding for the full seven‑year credit period, and credit is recaptured if specified events occur. § 45D(g).

• The CDFI Fund allocates authority and monitors allocatees; the IRS administers the tax credit (Forms 8874, 8874‑A, 8874‑B). See IRS “About Form 8874” (Jan. 23, 2025).

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New Markets Tax Credit (NMTC): Credit Calculation Summary

• NMTC is claimed over 7-years on specified credit allowance dates (§ 45D(a)(1), (a)(3)).

• The credit rate is (§ 45D(a)(2)):

  • 5% of the original investment amount in each of the first three years; and

  • 6% of the original investment amount in each of the final four years.

• The applicable percentage is 5% for each of the first three years and 6% for each of the final four years (total 39% of QEI).

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New Market Tax Credit (NMTC): Credit Allocation​

• ​NMTC allocation authority is awarded to CDEs by the CDFI Fund, not to individuals or businesses, and investors then make cash QEIs in allocatee CDEs and claim the credit. § 45D(f).

• Leverage structures (borrowed funds layered into the equity stack) are permissible and commonly used in practice. See Rev. Rul. 2003‑20, 2003‑1 C.B. 465.

• A CDE must invest substantially all (safe‑harbor 85%) of QEI proceeds in QLICIs within 12 months of receiving the funds. See § 45D(b)(1)(B), (b)(3); § 1.45D‑1(c)(5), (c)(5)(iv).

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New Market Tax Credit (NMTC): Tax Credit Recapture

NMTCs may be recaptured from investors during the 7-year credit period under certain circumstances. § 45D(g)(3). Events triggering recapture include:

• The QEI fails the “substantially-all” requirement such as

  • Failure to invest 85% of original QEI; or

  • Failure to meet “Qualified Active Low-Income Business” (QALICB) requirements; or

  • Failure to meet one-year investment/ reinvestment requirement.

• The CDE redeems the investment.

• The CDE ceases to qualify as a CDE.

 

However, Treas. Reg. § 1.45D‑1(e)(6) provide a one‑time, six‑month cure to fix a substantially‑all failure once detected.

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What is a Community Development Entity (CDE)?

In general, a CDE is any domestic corporation or partnership with a primary mission of serving or providing investment capital for low‑income communities/persons, accountability to LIC residents, and certification by the CDFI Fund. See § 45D(c)(1).

 

Only CDEs can apply for allocation; applications are processed by the CDFI Fund via competitive rounds (e.g., the combined CY 2024–2025 round with $10  billion authority).​​