New Market Tax Credits Program

History[edit] The New Markets Tax Credit Program was established as part of the Community Renewal Tax Relief Act of 2000. The goal of the program is to spur revitalization efforts of low-income and impoverished communities across the United States and Territories. The NMTC Program provides tax credit incentives to investors for equity investments in certified Community Development Entities, which invest in low-income communities.[1] The credit equals 39% of the investment paid out (5% in each of the first three years, then 6% in the final four years, for a total of 39%) over seven years (more accurately, six years and one day of the seventh year). A Community Development Entity must have a primary mission of investing in low-income communities and persons.[2] The concept behind the NMTC emerged in the late 1990s, when numerous foundations and think tanks were working to popularize the idea of using business-oriented mechanisms to help disadvantaged communities increase wealth and jobs. For example, business, community, academic, and public sector participants at the 1997 American Assembly meeting issued a report urging business leaders to reinvest in urban areas in the U.S. The final report also pushed nonprofit and government officials to help lead this new effort to open untapped markets through a fostering of "community capitalism." It defined community capitalism as a "for-profit, business-driven expansion of investment, job creation, and economic opportunities in distressed communities, with government and the community sectors playing key supportive roles." To accomplish this revival, participants called for improving access to capital (especially through equity investment) and ensuring greater technical assistance for businesses. These were seen as the two key ways of "energizing community capitalism in distressed areas". The report set out crucial components of the future New Markets initiative. The American Assembly disseminated the final report widely, including sending it to the White House and Congress. Vice President Al Gore, in support of the conference conclusions, stated that, "The greatest untapped markets In the world are right here at home, in our distressed communities." Overview[edit] The Community Development Financial Institutions (CDFI) Fund in the Department of the Treasury has been authorized to administer the program. Community Development Entities (CDEs) apply to the CDFI Fund each year not for tax credits directly, but for an award of "allocation authority"—that is, the authority to raise a certain amount of capital, or Qualified Equity Investments (QEIs) from investors. In the first year of the program (2001), the CDFI Fund awarded $1 billion in allocation authority to CDEs, enabling those CDEs to raise $1 billion in QEIs from investors, which enabled those investors to reduce their federal tax liability by $390 million (or 39% of the amount they invested in the CDEs) over seven years. For the investors to be able to claim the credits over the seven-year compliance period, the CDEs must use "substantially all" ("Sub All") of the QEIs from investors to make Qualified Low Income Community Investments (QLICIs) in Qualified Active Low Income Community Businesses (QALICBs) located in Low Income Communities (LICs). (Each of the previous terms—CDE, QEI, "Substantially All," QLICI, QALICB, and LIC—are defined in the Internal Revenue Code and other federal guidance.) Allocation Rounds[edit] Through 2010, there have been eight NMTC allocation rounds.[3] Allocation awards for a prior round are typically made within the first quarter of the calendar year after a round. In the eighth round (2010), the CDFI fund awarded the $3.5 billion allocation authority pool (which would generate $1.365B in tax credits for investors; $3.5B x 39% = $1.365B) to 99 CDEs out of a pool of 250 applicants, who had requested allocations totaling $23.5 billion.[4]