Understanding the New Market Tax Credits eligibility criteria is fundamental to accessing this powerful financing program that has channeled billions of dollars into economically distressed communities across the United States. The New Markets Tax Credit (NMTC) program establishes comprehensive eligibility criteria spanning geographic requirements, business operational standards, financial thresholds, and compliance obligations that together determine which projects qualify for below-market financing. These New Market Tax Credits eligibility criteria ensure that federal tax incentives target areas and businesses with genuine community development potential while maintaining program integrity and accountability. This comprehensive guide explains each eligibility criterion in detail, providing businesses and developers with a clear understanding of what they must demonstrate to secure NMTC financing.
Geographic Eligibility Criteria
The geographic component of New Market Tax Credits eligibility criteria establishes where projects must be located to qualify for program participation. These location-based requirements ensure NMTC resources flow to communities experiencing economic distress.
The primary geographic criterion requires projects to be located in census tracts designated as low-income communities. Census tracts qualify through two pathways: having a poverty rate of at least 20 percent based on the most recent American Community Survey (ACS) data, or having a median family income not exceeding 80 percent of the applicable area median income. The applicable area median income is calculated as the greater of the statewide or metropolitan area median family income for tracts within Metropolitan Statistical Areas (MSAs), or the greater of the statewide or national median family income for tracts outside MSAs.
Projects must use the official CDFI Fund NMTC Mapping Tool to definitively verify census tract qualification status. The targeted population provision creates an alternative geographic eligibility criterion for projects located outside qualifying census tracts. Projects can be eligible if they demonstrate that at least 50 percent of their customers, clients, tenants, or beneficiaries come from targeted populations, defined as individuals with incomes at or below 80 percent of the area median income or residents of low-income communities.
Qualified Active Low-Income Community Business Criteria
The New Market Tax Credits eligibility criteria include detailed requirements defining what constitutes a Qualified Active Low-Income Community Business (QALICB), ensuring that financed entities maintain genuine operational connections to low-income communities throughout the seven-year compliance period.
The Gross Income Criterion: At least 50 percent of the business’s total gross income must derive from the active conduct of a qualified trade or business within low-income communities. This majority threshold ensures businesses have a primary operational focus in target communities rather than merely a token presence. Gross income is calculated in accordance with federal tax principles and includes all revenue from business operations, whether received in cash or in other consideration.
The Tangible Property Criterion: A substantial portion of the business’s tangible property must be used within low-income communities. While the statute uses “substantial portion” without defining a specific percentage, Treasury regulations and CDE practice generally interpret this as requiring at least 40 percent of tangible property to be located and used in qualifying areas. Tangible property includes both owned and leased assets, with leased property valued at fair market value for calculation purposes.
The Employee Services Criterion: A substantial portion of services performed by the business’s employees must occur within low-income communities. Like the tangible property test, substantial portion typically means at least 40 percent. This criterion focuses on where employees physically perform work rather than where they reside, requiring businesses to maintain systems that track employees’ work locations to document compliance.
The Active Business Requirement: Businesses must engage in active trade or business operations that produce goods or services, rather than merely holding investments, collecting rents from unrelated parties, or managing financial assets. This criterion ensures NMTC supports genuine economic activity that creates jobs and community benefits rather than passive investment strategies.
Prohibited Business Exclusions
The New Market Tax Credits eligibility criteria explicitly exclude certain business types regardless of location or operational characteristics. The prohibited business criterion excludes private or commercial golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks, and other facilities used for gambling. Working with NMTC advisory services helps clarify whether your business activities fall within prohibited categories.
Stores whose principal business is selling alcoholic beverages for off-premises consumption are excluded from NMTC eligibility. The “principal business” standard creates an important distinction—restaurants selling alcohol for on-premises consumption with food service qualify, as do grocery stores with beer and wine sections where alcohol sales are incidental.
The rental of real property to unrelated parties creates complications for NMTC eligibility. Passive real estate rental generally doesn’t qualify as active business operations meeting QALICB standards. Non-residential real estate must be at least 80 percent occupied by QALICB tenants throughout the compliance period to satisfy this criterion.
Entity Structure and Organizational Criteria
The domestic entity criterion requires that QALICBs be organized under the laws of the United States. Foreign entities cannot directly qualify as QALICBs receiving NMTC financing. Organizational entities, including corporations, Limited Liability Companies (LLCs), partnerships, and specific other structures, can meet NMTC eligibility criteria. Most Community Development Entities (CDEs) prefer working with entities providing clear separation between business and personal assets.
Nonprofit organizations, including 501(c)(3) entities, can satisfy New Market Tax Credits eligibility criteria and receive NMTC financing for their operations. Many healthcare facilities, charter schools, and community service organizations structured as nonprofits have successfully accessed NMTC capital. However, nonprofits cannot serve as tax credit investors because they are tax-exempt.
Financial Viability and Creditworthiness Criteria
While not explicitly codified in statute or regulations, practical New Market Tax Credits eligibility criteria include demonstrating sufficient financial strength and business viability to sustain operations throughout the seven-year compliance period and service NMTC financing obligations.
The Creditworthiness Criterion: Businesses must demonstrate reasonable prospects for financial success through historical financial performance, realistic projections, and sound business fundamentals. CDEs conduct thorough underwriting, evaluating revenue sustainability, expense management, cash flow adequacy, and overall economic health. Businesses with persistent losses, deteriorating financial trends, or unrealistic projections struggle to meet this criterion.
The Debt Service Capacity Criterion: Projected cash flows must provide adequate coverage for all debt obligations, including NMTC financing and any senior debt. CDEs typically require debt service coverage ratios of 1.20 to 1.35 times or higher, depending on project risk profiles. Insufficient cash flow to service debt represents a fundamental barrier to meeting eligibility criteria, regardless of other strengths.
The Management Capability Criterion: Business leadership must possess relevant experience, industry knowledge, and operational expertise necessary to execute business plans successfully. Strong management teams with proven track records significantly strengthen eligibility profiles, while inexperienced or untested management raises concerns about business viability. Review successful NMTC projects to understand the management credentials CDEs seek.
Investment Size and Transaction Economics Criteria
The Minimum Size Criterion: While not legally mandated, most NMTC transactions involve allocations of $2 million to $5 million due to fixed transaction costs, including legal fees, structuring expenses, and compliance systems. Projects that fall below these thresholds may struggle to find CDEs willing to proceed.
The Capital Stack Feasibility Criterion: NMTC allocation must fit logically within overall project financing, including senior debt, subordinated debt, and equity. Projects must demonstrate how NMTC financing integrates with other capital sources to meet total funding requirements. Understanding how CDFI financing structures work helps position projects for success.
Community Impact Criteria
While community impact is not technically a legal eligibility requirement, CDEs increasingly evaluate projects based on demonstrable community benefits.
The Job Creation Criterion: Projects creating substantial employment opportunities for low-income community residents receive priority. Projects generating more jobs with higher wages and better benefits receive preference from many CDEs.
The Essential Services Criterion: Projects that provide healthcare, education, fresh food, childcare, or other services addressing unmet community needs align closely with NMTC program objectives. Projects that demonstrate they fill genuine service gaps, backed by community needs assessments, strengthen their eligibility profile.
The Community Support Criterion: Projects with backing from community organizations, residents, and local leadership demonstrate genuine community priorities. Letters of support and endorsements from trusted community institutions validate that projects serve authentic community needs.
Compliance and Monitoring Criteria
The New Market Tax Credits eligibility criteria extend beyond initial qualification to include ongoing compliance obligations throughout the seven-year credit period.
The Continuous QALICB Status Criterion: Businesses must maintain qualification throughout the compliance period, not just at initial investment. Changes in operations that cause businesses to fall below substantial use thresholds create compliance failures, triggering credit recapture. Companies must maintain systems that document the continued satisfaction of all QALICB tests annually.
The Cooperation with Monitoring Criterion: Businesses must provide annual financial statements, employee location data, income-source documentation, and other information that CDEs need to verify ongoing compliance. Failure to cooperate with reasonable monitoring requests can jeopardize compliance status.
The Census Tract Maintenance Criterion: Qualifying census tract status must exist at the time of Qualified Equity Investment (QEI) investment. Subsequent census data updates changing qualification status don’t affect existing investments due to grandfathering protections.
Documentation and Verification Criteria
Meeting the New Market Tax Credits eligibility criteria requires comprehensive documentation demonstrating compliance with all requirements. Essential documentation includes census tract verification reports from the CDFI Fund NMTC Mapping Tool, financial statements and tax returns demonstrating financial position, business plans describing operations and community connections, organizational documents establishing legal structure, and site control documentation proving property rights.
The verification criterion requires that all claimed facts be supported by authoritative documentation subject to CDE review and potential Internal Revenue Service (IRS) audit. Unsupported claims or inadequate documentation raise eligibility questions even when the underlying facts might satisfy the requirements.
Understanding Your Eligibility Status
The New Market Tax Credits eligibility criteria create comprehensive frameworks that ensure program resources reach businesses and communities where they can generate the maximum economic development impact. By understanding geographic requirements, QALICB operational standards, prohibited business exclusions, entity structure needs, financial viability expectations, and compliance obligations, businesses can accurately assess whether they meet criteria and prepare materials demonstrating qualification effectively.
Ready to determine whether your project meets New Market Tax Credits eligibility criteria? Contact CBO Financial for a comprehensive project analysis that evaluates your geographic qualifications, business structure, financial viability, and potential community impact. Our team helps businesses and developers across the United States navigate NMTC eligibility requirements and access transformative financing for projects that strengthen underserved communities while building successful enterprises.