Investors seeking to deploy capital into underserved communities while obtaining valuable tax benefits must navigate a complex eligibility framework before accessing New Market Tax Credits (NMTCs). The program offers substantial incentives—39% of the investment amount in tax credits over seven years—but qualification requirements are rigorous. Understanding how to evaluate whether your investment meets NMTC criteria systematically saves time and prevents costly missteps.
Understanding the NMTC Investment Structure
Investors make Qualified Equity Investments (QEIs) in Community Development Entities (CDEs) that have received allocation authority from the Community Development Financial Institutions (CDFI) Fund. These CDEs then deploy substantially all proceeds into Qualified Low-Income Community Investments (QLICIs), which include loans to or equity investments in Qualified Active Low-Income Community Businesses (QALICBs).
The tax credits flow to the investor, not to the underlying business receiving capital. You’re evaluating whether your investment in a CDE qualifies, though the business’s qualification as a QALICB directly affects whether your CDE investment generates the desired tax credits.
Step One: Verify CDE Certification
Confirm that the entity receiving your investment holds a valid CDE certification. Not every organization can offer NMTC benefits—only certified CDEs can accept QEIs that generate tax credits. The CDFI Fund maintains a public database of certified CDEs that you can search to verify certification status.
A legitimate CDE must be a domestic corporation or partnership with a primary mission of serving low-income communities. At least 75% of the entity’s board members must have significant ties to low-income communities. Verify not only that the organization holds CDE certification but also that it has received NMTC allocation authority for the current funding round—request documentation showing the CDE’s remaining allocation capacity.
Step Two: Confirm Qualified Equity Investment Status
Your capital deployment must meet the technical definition of a QEI to generate tax credits. This requires making an equity investment in a CDE, with substantially all proceeds used for QLICIs. The investment must be made in exchange for stock in a corporation or a capital interest in a partnership.
Timing matters significantly. Your investment must be made during the period specified in the CDE’s allocation agreement. The QEI cannot be purchased on a secondary market—only direct investments in CDEs qualify. Verify that the CDE will deploy substantially all—defined as 85%—of your investment proceeds into QLICIs within 12 months of your investment date.
Step Three: Evaluate the Underlying Business as a QALICB
While you’re technically investing in the CDE, the business must qualify as a QALICB for your investment to generate credits. Begin with geographic verification. The company must be located in a low-income community defined as a census tract with a poverty rate of at least 20% or where the median family income doesn’t exceed 80% of the area median.
Businesses located outside qualifying tracts can still meet requirements if at least 50% of their employees reside in low-income communities, or at least 50% of their gross income derives from sales or services provided to low-income persons or communities.
Step Four: Assess Business Activity Requirements
The business must derive at least 50% of its gross income from the active conduct of a qualified business within a low-income community. This “active business” requirement distinguishes operating businesses from passive investment vehicles. Review the business’s income sources to confirm that more than half of its income comes from operational activities rather than portfolio investments or passive activities.
At least 40% of the business’s tangible property must be used in a low-income community. Additionally, less than 5% of the aggregate unadjusted bases of the property can be attributable to specific financial property and collectibles.
Step Five: Identify Prohibited Business Types
Even if a business meets the location and activity requirements, certain business types are categorically excluded from NMTC eligibility. Verify that the company doesn’t operate as a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or racetrack. Businesses primarily engaged in alcohol sales, including liquor stores and bars, face exclusion, though restaurants serving alcohol with meals typically qualify. Gambling facilities, adult entertainment operations, and facilities restricting membership based on protected characteristics are also prohibited.
Rental residential real estate projects generally don’t qualify unless they’re part of mixed-use developments where residential components are clearly subordinate to commercial uses.
Step Six: Verify Financial and Size Standards
The business cannot have excessive tangible property relative to the NMTC investment. Calculate whether the business’s tangible property after receiving NMTC proceeds would exceed $50 million in adjusted basis. Review the business’s income composition to ensure that no more than 15% of gross income comes from the rental of real property. Confirm that the company isn’t owned or controlled by another entity in a way that would cause it to fail the QALICB tests.
Step Seven: Examine Community Impact Commitments
While not strictly legal requirements under the tax code, CDEs typically require businesses to commit to job-creation targets and community-benefit outcomes. Evaluate whether the company can realistically achieve projected job creation numbers, whether hiring commitments include targeting low-income community residents, and whether compensation levels meet CDE expectations.
Step Eight: Review Compliance Period Obligations
NMTC investments carry a seven-year compliance period during which your investment must remain in place and the business must maintain QALICB status. Premature exit, business failure, or loss of QALICB status triggers credit recapture—the IRS requires repayment of previously claimed credits. Assess the business’s financial stability and likelihood of maintaining operations throughout the compliance period.
Step Nine: Analyze Transaction Structure
NMTC transactions typically involve multiple entities and complex financial arrangements. Map the entire structure, including the investment fund, CDE, leverage lenders, and the business receiving capital. Examine documents, including the partnership agreement, loan agreement, guarantee arrangements, and put/call options that typically unwind transactions after seven years.
Step Ten: Conduct Tax and Legal Due Diligence
Engage qualified tax counsel experienced in NMTC transactions to review all aspects of the investment structure. The complexity of NMTC rules means that seemingly minor technical failures can disqualify otherwise legitimate investments. Request legal opinions from the CDE’s counsel addressing the QALICB status of the underlying business and the qualification of your investment as a QEI.
Working With Experienced NMTC Partners
The complexity of NMTC eligibility assessment makes working with experienced CDEs, consultants, and legal advisors essential. Established CDEs bring deep expertise in structuring compliant transactions.
Determining whether your investment qualifies for NMTCs requires methodical evaluation across multiple dimensions—CDE certification, investment structure, business qualification, prohibited activities, financial standards, and compliance obligations. For expert guidance on navigating NMTC investment eligibility, explore our NMTC advisory services, review successful investments in our project portfolio, or request a free project analysis to assess your investment opportunity.