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 percent of the investment amount in tax credits over seven years—but qualification requirements are rigorous and multifaceted. Understanding how to systematically evaluate whether your investment meets NMTC criteria saves time, prevents costly missteps, and positions you for successful participation in this powerful community development tool.
Understanding the NMTC Investment Structure
Before assessing eligibility, investors must understand the fundamental NMTC transaction 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 of the investment proceeds into Qualified Low-Income Community Investments (QLICIs), which include loans to, equity investments in, or financial counseling services for Qualified Active Low-Income Community Businesses (QALICBs).
The tax credits flow to the investor, not to the underlying business receiving capital. This distinction is crucial: you’re evaluating whether your investment in a CDE qualifies, not whether a business qualifies for financing. However, the business’s qualification as a QALICB directly affects whether your CDE investment generates the desired tax credits.
How Do I Determine if My Investment Qualifies for New Market Tax Credits?
Determining investment eligibility requires systematic evaluation across multiple criteria, each presenting specific requirements that must be met for qualification.
Step One: Verify You’re Investing in a Certified Community Development Entity
Your first step involves confirming that the entity receiving your investment holds 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 or low-income persons. At least 75 percent of the entity’s board members or governing body must comprise individuals who have significant ties to low-income communities through residency, employment, or community service. Additionally, the CDE must maintain accountability to residents of low-income communities through representation on advisory boards or other formal feedback mechanisms.
Verify not only that the organization holds CDE certification but also that it has received NMTC allocation authority for the current funding round. CDEs without available allocation cannot offer tax credits regardless of their certification status. Request documentation showing the CDE’s remaining allocation capacity and confirmation that your investment will be made within the allocation period specified in their award agreement.
Step Two: Confirm Your Investment Constitutes a Qualified Equity Investment
Your capital deployment must meet the technical definition of a QEI to generate tax credits. This requires making an equity investment in a CDE where substantially all of the proceeds will be 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 with the CDFI Fund. Investments made before allocation award or after the allocation period expires cannot generate credits, regardless of whether the underlying business would otherwise qualify.
The QEI cannot be purchased on a secondary market from a previous investor. Only direct investments in CDEs qualify. If you’re considering acquiring an existing NMTC position, understand that the tax credits remain with the original investor and don’t transfer with the investment.
Verify that the CDE will deploy substantially all—defined as 85 percent—of your investment proceeds into QLICIs within 12 months of your investment date. The CDE should provide a clear deployment plan showing how proceeds will be invested and the timeline for deployment. Failure to meet this substantial deployment requirement disqualifies the investment from generating credits.
Step Three: Evaluate the Underlying Business as a QALICB
While you’re technically investing in the CDE rather than the underlying business, the business must qualify as a QALICB for your investment to generate credits. This evaluation encompasses multiple requirements that must all be satisfied.
Begin with geographic verification. The business must be located in a low-income community defined as a census tract with a poverty rate of at least 20 percent or where median family income doesn’t exceed 80 percent of the area median. The CDFI Fund provides mapping tools showing all qualifying census tracts, allowing you to verify location eligibility. If the business operates in multiple locations, each location where NMTC proceeds will be used must meet geographic requirements.
Some businesses located outside qualifying tracts can still meet requirements if at least 50 percent of their employees reside in low-income communities, or at least 50 percent of their total gross income derives from sales or services provided to low-income persons or low-income communities. This alternative qualification pathway requires substantial documentation, making geographic location within qualifying tracts the simpler approach.
Step Four: Assess Business Activity and Active Trade Requirements
The business must derive at least 50 percent 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 that wouldn’t generate community benefit through employment or services.
Review the business’s income sources to confirm that more than half comes from operational activities rather than portfolio investments, rents from unrelated parties, or passive activities. A manufacturing company generating revenue from product sales clearly meets this test, while a holding company collecting investment returns would not.
Examine the business’s tangible property. At least 40 percent of the business’s tangible property must be used in a low-income community. For brick-and-mortar operations located entirely within qualifying tracts, this requirement presents no challenge. For businesses with multiple locations, calculate what percentage of property by value is located in qualifying areas.
Additionally, less than 5 percent of the average of the aggregate unadjusted bases of the property of the business can be attributable to certain financial property and collectibles. This prevents businesses that are essentially asset management operations from qualifying.
Step Five: Identify Prohibited Business Types
Even if a business meets location and activity requirements, certain business types face categorical exclusion from NMTC eligibility. Verify that the business 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 (though restaurants serving alcohol with meals typically qualify). Gambling facilities or operations. Businesses providing adult entertainment. Facilities restricting membership or services based on protected characteristics.
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. If the project involves any residential component, scrutinize the structure carefully to ensure compliance.
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 the NMTC proceeds would exceed $50 million in adjusted basis. If so, the business doesn’t qualify unless it meets an alternative test based on employee count or gross receipts.
Review the business’s income composition to ensure that no more than 15 percent of gross income comes from rental of real property. Higher percentages may indicate the business is essentially a passive real estate operation rather than an active business enterprise.
Confirm that the business isn’t owned or controlled by another entity in a way that would cause it to fail the QALICB tests. Complex corporate structures with parent companies or affiliated entities require careful analysis to ensure the specific entity receiving NMTC financing meets all requirements independently.
Step Seven: Examine Job Creation and 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. Review the CDE’s allocation agreement to understand what community impact metrics they’ve committed to the CDFI Fund, as your investment supports those commitments.
Evaluate whether the business can realistically achieve projected job creation numbers, whether hiring commitments include targeting low-income community residents, and whether compensation levels meet CDE expectations. Weak community benefit projections may indicate the CDE won’t prioritize the deal or that the business doesn’t align well with program objectives.
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. Request financial projections, examine historical performance if available, and evaluate management’s track record. Consider market conditions, competitive dynamics, and sector outlook to gauge sustainability.
Understand the CDE’s approach to ongoing compliance monitoring. Reputable CDEs actively track portfolio companies, conduct site visits, review financial reports, and intervene early when challenges emerge. This oversight protects your investment and credit eligibility.
Step Nine: Analyze the Complete Transaction Structure
NMTC transactions typically involve multiple entities and complex financial arrangements. Map the entire structure including the investment fund, CDE, investment fund leverage lenders, and the business receiving capital. Identify each entity’s role, obligations, and how capital flows through the structure.
Examine documents including the partnership agreement governing the investment fund, the loan agreement between the CDE and business, any guarantee or security arrangements, and the put/call options that typically unwind transactions after seven years. Ensure that all structural elements comply with NMTC requirements and that you understand your rights and obligations.
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. Professional guidance identifies potential issues and confirms compliance.
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. These opinions provide some protection if questions arise later, though they don’t guarantee IRS agreement.
Consider obtaining an independent appraisal valuing your QEI to support the credit amount you’ll claim. While not required, proper valuation documentation strengthens your position if the IRS examines your return.
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 and have track records demonstrating their understanding of program requirements. They can guide you through the evaluation process, identify potential issues early, and structure investments that optimize both credits and community impact.
Conclusion
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. Each element presents specific requirements that must be satisfied for credit eligibility. While the process is complex, systematic assessment following these steps clarifies qualification status and identifies any obstacles requiring resolution. For investors committed to both financial returns and community impact, this due diligence effort unlocks access to one of the most powerful incentives for investing in America’s underserved communities.