Understanding the requirements for the New Markets Tax Credit (NMTC) program is essential for businesses, investors, and communities seeking to leverage this powerful federal incentive. The NMTC program provides tax credit allocation to certified Community Development Entities (CDEs), enabling them to attract private investment into low-income communities across the United States and its territories.
Basic NMTC Eligibility Criteria
The New Markets Tax Credit program has specific requirements that projects must meet to qualify for financing. At its core, NMTC eligibility revolves around two key factors: geographic location and business purpose.
Geographic Requirements: Projects must be located in qualifying Low-Income Communities (LICs). These are census tracts with a poverty rate of at least 20% or with a median family income below 80% of the area median. Some non-LIC census tracts may also qualify if they are contiguous to LICs and meet specific criteria regarding median family income.
Business Purpose Requirements: The NMTC program targets businesses that will create jobs, provide services, or stimulate economic growth in underserved areas. Eligible qualified active low-income community businesses (QALICBs) must derive at least 50% of their gross income from active conduct of trade or business within LICs, or at least 40% of their employees must reside in LICs, or at least 40% of their tangible property must be located in LICs.
Community Development Entity Certification
To participate in the NMTC program, organizations must first become certified as Community Development Entities. Working with experienced CDFI consultants can streamline the certification process and ensure compliance with all federal requirements.
CDEs must be domestic corporations or partnerships with a primary mission of serving low-income communities. They must maintain accountability to residents of low-income communities through representation on governing or advisory boards. The application process involves demonstrating a track record of community development lending or investment activities.
Investment and Tax Credit Structure
The NMTC provides investors with a federal tax credit totaling 39% of their investment over seven years. This credit is claimed at 5% for the first three years and 6% for the remaining four years. Understanding this structure is crucial for both investors and businesses seeking new market tax credit financing services.
Investment Requirements: CDEs must make Qualified Low-Income Community Investments (QLICIs), which include loans to QALICBs, equity investments in QALICBs, or specific financial counseling and services. At least 85% of a CDE’s investment proceeds must be deployed to qualified investments within the required timeframe.
QALICB Qualification Standards
Businesses seeking NMTC financing must qualify as QALICBs. This designation requires meeting specific operational and financial tests:
- Gross Income Test: At least 50% of total gross income must be derived from the active conduct of business within LICs
- Tangible Property Test: At least 40% of tangible property must be used in LICs
- Employment Test: At least 40% of services performed by employees must be within LICs
- Business Restrictions: Certain businesses are ineligible, including golf courses, massage parlors, hot tub facilities, suntan facilities, and racetracks
Capital Stack and Leveraged Structures
Most NMTC transactions involve complex capital structures that require sophisticated financial planning. Our team provides NMTC advisory services to help clients navigate these arrangements effectively.
Typical NMTC capital stacks include senior debt, NMTC allocation, and equity contributions. The leveraged structure allows for debt forgiveness at the end of the seven-year compliance period, creating significant economic benefits for qualified projects.
Application and Allocation Process
The CDFI Fund administers the NMTC program through a competitive application process. CDEs must apply for allocation authority during specific application windows. The application requires detailed information about the organization’s financing strategy, community impact plans, and capacity to deploy capital effectively.
Key Application Components:
- Business strategy and track record
- Capitalization strategy
- Management capacity
- Community impact measurement
- Service area demographics
Compliance and Reporting Requirements
Once a CDE receives allocation and deploys investments, ongoing compliance is mandatory. CDEs must submit annual compliance reports demonstrating that investments continue to meet QALICB requirements and that investors properly claim credits.
Non-compliance can result in recapture of tax credits, making it essential to maintain accurate records and ensure all investments remain in compliance throughout the seven-year credit period.
Real-World Applications
The NMTC program has successfully funded diverse projects across the United States, from healthcare facilities and charter schools to manufacturing facilities and grocery stores in food deserts. Review our NMTC projects to see how businesses and communities have leveraged this program for transformative development.
Getting Started with NMTC
Navigating New Market Tax Credit requirements can be complex, but partnering with experienced consultants simplifies the process. Whether you’re a business seeking financing or an investor looking for tax credit opportunities, understanding these requirements is your first step toward success.
The NMTC program represents one of the most powerful tools for community economic development in the United States. By meeting the program’s requirements and working with knowledgeable partners, you can unlock significant capital for projects that create jobs, provide essential services, and revitalize underserved communities.
Ready to explore whether your project qualifies for NMTC financing? Contact our team for a free project analysis to assess your eligibility and develop a comprehensive funding strategy.