The federal guidelines for New Market Credits establish the comprehensive regulatory framework governing the New Markets Tax Credit (NMTC) program from initial Community Development Entity (CDE) certification through final credit claiming and compliance verification. These guidelines originate from statutory law, Treasury regulations, Internal Revenue Service (IRS) rulings, and Community Development Financial Institutions (CDFI) Fund allocation notices. Understanding these federal guidelines enables participants across the United States to navigate new market tax credit requirements confidently and avoid costly mistakes that could trigger credit recapture.
Statutory Foundation: Internal Revenue Code Section 45D
The foundational federal guidelines are derived from Section 45D of the Internal Revenue Code (IRC), enacted by the Community Renewal Tax Relief Act of 2000. This statutory provision establishes the basic architecture of the NMTC program, including qualified investments, credit calculations, and eligibility requirements.
Section 45D defines the Qualified Equity Investment (QEI) as any equity investment in a CDE acquired at original issue solely in exchange for cash, substantially all of which is used by the CDE to provide investments in low-income communities.
The statute establishes the 39 percent total credit amount claimed over seven years—five percent annually for the first three years and six percent annually for the final four years. Section 45D also defines low-income communities as census tracts with poverty rates of at least 20 percent or median family incomes not exceeding 80 percent of the applicable area median income. It includes targeted population provisions that create alternative qualification pathways.
Treasury Regulations and Implementation Guidance
The Treasury Department has issued comprehensive regulations implementing Section 45D of the Internal Revenue Code under Title 26 of the Code of Federal Regulations. Treasury Regulation Section 1.45D-1 defines critical terms including CDE, low-income community, qualified active low-income community business (QALICB), and qualified low-income community investment (QLICI).
The substantial-use tests that QALICBs must meet are detailed. The regulations generally interpret “substantial “as meaning that at least 40 percent of business income, tangible property, and employee services must occur in low-income communities. Recapture provisions define the circumstances that trigger credit recapture, clarifying that recapture occurs if QEI ceases to be a qualified investment before the end of the seven-year credit period.
IRS Guidance and Revenue Rulings
Beyond formal Treasury regulations, the IRS issues guidance documents, including revenue rulings, revenue procedures, and private letter rulings that clarify specific issues. IRS Notice 2006-60 provides extensive guidance on various NMTC issues, including treatment of fees paid by CDEs, QALICB qualification, and compliance scenarios. The IRS regularly updates Publication 4671, the NMTC Guide, which explains credit claiming procedures, required forms, and documentation requirements.
CDFI Fund Regulations and Allocation Notices
The CDFI Fund administers the NMTC allocation process through regulations in Title 12 of the Code of Federal Regulations. These establish CDE certification requirements, application procedures for allocation, and compliance monitoring frameworks.
CDE certification requirements define what constitutes a primary mission of serving low-income communities and how CDEs demonstrate accountability through governance structures. Allocation application procedures combine standing regulations with annual allocation notices, emphasizing policy priorities such as severely distressed communities, rural projects, and support for minority-owned businesses.
The CDFI Fund requires CDEs to submit annual compliance reports documenting allocation deployment, QLICI qualification, and community impact metrics, including jobs created and retained nationwide.
Allocation and Deployment Timelines
Federal guidelines establish specific timelines governing the allocation and deployment of resources. CDEs must deploy at least 85 percent of QEI proceeds to make QLICIs within 12 months of receiving the investment. CDEs typically have 3 to 5 years to deploy their full allocation authority. The seven-year compliance period begins when QEI occurs and continues through seven complete years during which all program requirements must be continuously satisfied.
Credit Claiming Procedures and Forms
Investors claim NMTC using IRS Form 8874, New Markets Credit, which must be attached to their annual tax returns. Form 8874 requires detailed information about the QEI, including investment date, amount, CDE identification, and credit calculations. Investors must maintain comprehensive documentation supporting all information in the event of an IRS audit. Working with experienced NMTC advisory services ensures proper credit claiming procedures.
Qualified Business Standards and Prohibited Activities
Federal guidelines establish detailed standards for what constitutes qualified business activities eligible for NMTC financing. These guidelines explicitly prohibit certain business types, including golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks, and gambling facilities, and stores principally selling alcohol for off-premises consumption.
The prohibition on renting residential real estate is extensively addressed in federal guidelines. While residential rental is generally prohibited, guidelines clarify exceptions for residential real estate that is integral to active business operations. Non-residential real estate must be at least 80 percent occupied by QALICBs to satisfy program requirements.
Guidelines address how to determine whether a business’s principal activity falls within prohibited categories. When companies conduct multiple activities, guidelines focus on revenue sources, operational emphasis, and overall business purpose to determine principal activities. Incidental involvement in otherwise prohibited activities does not disqualify businesses whose principal operations are permissible.
Compliance Monitoring and Enforcement
Federal guidelines establish comprehensive compliance monitoring systems. CDEs must conduct annual compliance reviews of their QLICI investments, documenting continued QALICB status, satisfaction of substantial-use tests, proper census tract qualification, and absence of prohibited activities. The CDFI Fund conducts its own monitoring through annual reporting requirements and periodic examinations. The IRS enforces compliance through examinations and audits. Review successful NMTC projects to understand how compliance requirements are maintained throughout the seven years.
Navigating Federal Guidelines Successfully
The federal guidelines for New Market Credits create a comprehensive regulatory framework governing every aspect of program participation, from CDE certification through credit claiming and compliance verification. Understanding these guidelines — from statutory foundations to Treasury regulations, IRS guidance, and CDFI Fund requirements — enables participants to navigate the program successfully and access this powerful community development financing tool.
Need help navigating complex federal NMTC guidelines? CBO Financial provides expert guidance on compliance requirements, credit claiming procedures, and regulatory interpretation. Contact us for a comprehensive project analysis to ensure your NMTC transaction meets all federal guidelines and positions your project for success nationwide.