Understanding the requirements for New Market Tax Credits is essential for any business or real estate developer seeking to access this transformative financing program. The New Markets Tax Credit (NMTC) program has become a cornerstone of economic development in underserved communities, providing billions of dollars in capital to areas that traditional financing often overlooks. This guide unlocks the key requirements for New Market Tax Credit program success.
Fundamental Legislative Requirements
The requirements for New Market Tax Credits are outlined in Section 45D of the Internal Revenue Code, enacted by the Community Renewal Tax Relief Act of 2000. Congress designed the program to incentivize private investment in low-income communities by providing federal tax credits to investors who make Qualified Equity Investments (QEIs) in certified Community Development Entities (CDEs). The legislation established a 39 percent tax credit to be claimed over seven years.
The CDFI Fund, part of the U.S. Department of the Treasury, administers the NMTC program and issues detailed regulations, compliance guidelines, and allocation notices.
Geographic Location Requirements
Among the most critical requirements is the geographic location mandate, which ensures projects serve genuinely distressed communities. Projects must be located in census tracts that qualify as low-income communities based on specific economic criteria.
A census tract qualifies through two pathways: a poverty rate of at least 20 percent, or a median family income not exceeding 80 percent of the applicable area median income. The CDFI Fund provides online mapping tools that allow applicants to verify whether specific addresses fall within qualifying census tracts.
Qualified Active Low-Income Community Business Standards
The requirements include detailed standards defining what constitutes a Qualified Active Low-Income Community Business (QALICB). These standards ensure NMTC financing supports genuine business operations with meaningful connections to low-income communities.
To qualify as a QALICB, businesses must satisfy three substantial use tests:
Gross Income Test: At least 50 percent of the business’s total gross income must derive from the active conduct of a qualified business within a low-income community. This majority threshold ensures the company has a primary operational focus in the target community.
Tangible Property Test: At least 40% of the tangible property must be used in a low-income community. Tangible property includes both owned and leased assets, with leased property valued at fair market value.
Employee Services Test: At least 40 percent of services performed by the business’s employees must occur within a low-income community. This requirement focuses on where employees physically perform work, not where they reside.
Business Type Restrictions and Prohibitions
Understanding which businesses do not qualify is essential. Congress explicitly excluded certain business types from program eligibility to ensure NMTC capital supports productive economic activities.
Prohibited businesses include private or commercial golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks, and other facilities used for gambling. Additionally, any store whose principal business is selling alcoholic beverages for off-premises consumption is excluded from NMTC eligibility.
The rental of real property is subject to restrictions. However, rental real estate can qualify if it serves the QALICB tenant’s active business operations. Non-residential real estate must maintain at least 80 percent occupancy by QALICBs throughout the seven-year compliance period to preserve eligibility.
Community Development Entity Certification
Businesses cannot access NMTC financing directly. Instead, they must work through certified CDFI fund CDEs that have been granted allocation authority. A CDE must be a domestic corporation or partnership with a primary mission of serving or providing investment capital for low-income communities, documented in the entity’s charter, bylaws, or organizational documents.
CDEs must maintain accountability to residents of low-income communities by ensuring that community voices influence how NMTC capital is deployed through representation on governing or advisory boards.
Qualified Equity Investment Requirements
The requirements define specific standards for Qualified Equity Investments that trigger the tax credit. A QEI must be an equity investment in a CDE made in cash, cannot include any loan or debt instrument, and must remain outstanding throughout the entire seven-year credit period. CDEs must deploy at least 85 percent of QEI proceeds to make Qualified Low-Income Community Investments (QLICIs) within 12 months, ensuring NMTC capital moves quickly into NMTC for real estate projects.
Compliance Period Obligations
The seven-year compliance period is among the most demanding requirements. Throughout this period, all parties must maintain strict adherence to program requirements to avoid credit recapture.
Businesses must submit annual compliance reports to their CDEs demonstrating continued QALICB status, including financial statements, documentation of tangible property locations, employee records, and verification that operations remain within qualifying census tracts. CDEs must actively monitor their portfolio investments throughout the compliance period.
Financial and Operational Viability Standards
While not explicitly codified in statute, practical requirements include demonstrating financial and operational viability sufficient to support sustainable business operations. CDEs must ensure businesses receiving NMTC financing have reasonable prospects for success.
Applicants should prepare comprehensive business plans demonstrating market opportunity, competitive positioning, and growth strategies. Financial projections spanning at least the seven-year compliance period help CDEs evaluate whether businesses can maintain operations and meet QALICB tests continuously. Engaging experienced NMTC advisory professionals helps navigate these requirements effectively.
Conclusion
The requirements for New Market Tax Credits create a comprehensive framework ensuring program capital reaches genuinely distressed communities and supports viable businesses that generate meaningful economic impact. While these requirements may seem complex, they serve important purposes in targeting resources effectively, protecting program integrity, and ensuring accountability to communities.
Success depends on thorough preparation, attention to detail, and often working with experienced NMTC advisors who understand program nuances. By carefully evaluating each requirement, thoroughly documenting eligibility, and planning for long-term compliance obligations, businesses position themselves to access this powerful financing tool and help revitalize underserved communities across America.