For businesses operating in economically distressed communities, accessing adequate capital to support growth, facility improvements, or equipment purchases often presents formidable challenges. Traditional lenders may view these businesses as higher risk due to their location, limited collateral, or unconventional business models, creating financing gaps that impede economic opportunity in the communities that need it most. The New Market Tax Credit (NMTC) program offers a powerful solution to this capital access problem by incentivizing private investment in low-income communities. Understanding what are New Market Tax Credits and how do they work for businesses helps entrepreneurs identify whether this federal program can support their growth objectives while revitalizing the communities they serve.
The Foundation: What Are New Market Tax Credits?
The New Market Tax Credit program is a federal community development initiative established by Congress in 2000 through the Community Renewal Tax Relief Act. The program aims to stimulate private investment and economic growth in economically distressed communities across the United States by providing tax credit incentives to investors who deploy capital in these underserved areas.
At its core, the NMTC program provides a 39% federal tax credit to investors who make qualified equity investments in specialized financial intermediaries called Community Development Entities (CDEs). These CDEs, in turn, deploy the invested capital to businesses and real estate projects located in low-income communities. The tax credit is claimed over seven years according to a fixed schedule: 5% of the investment amount for each of the first three years, and 6% for each of the subsequent four years.
This structure creates a powerful incentive mechanism. The substantial tax credit enables CDEs to offer financing to businesses at below-market interest rates, with favorable repayment terms, or through quasi-equity structures that would be unavailable through conventional lending channels. For businesses in low-income communities struggling to secure adequate financing, NMTC capital can make the difference between remaining limited by capital constraints and achieving transformative growth.
Since its inception, the NMTC program has directed tens of billions of dollars in investment capital to economically distressed communities, supporting thousands of businesses, creating and retaining hundreds of thousands of jobs, and catalyzing comprehensive community revitalization across urban, suburban, and rural areas nationwide.
How the Program Works: The Multi-Party Structure
Understanding what are New Market Tax Credits and how do they work for businesses requires comprehending the program’s multi-party structure involving several key players, each serving specific roles in the financing ecosystem.
Community Development Entities serve as the program’s linchpin. CDEs are specialized organizations certified by the Community Development Financial Institutions Fund (CDFI Fund)—the federal agency administering the NMTC program. To qualify as CDEs, organizations must demonstrate a primary mission of serving low-income communities and maintain accountability to residents of these communities through governance structures, advisory boards, or other mechanisms ensuring community input.
CDEs compete for NMTC allocation authority through competitive application rounds conducted by the CDFI Fund. When a CDE receives an allocation—typically ranging from $10 million to $100 million or more—it gains the authority to issue tax credits to investors who make qualified investments in that CDE. The CDE then has three years to deploy the allocated capital to eligible businesses and projects in qualified low-income communities.
Tax Credit Investors provide the capital that CDEs deploy. These investors—typically corporations, financial institutions, or high-net-worth individuals with substantial federal income tax liability—make qualified equity investments in CDEs specifically to receive the 39% tax credit over seven years. The tax credit provides the primary return on their investment, though some NMTC structures also return a portion of the original investment after the compliance period expires.
Qualified Active Low-Income Community Businesses (QALICBs) represent the businesses receiving financing through NMTC capital. To qualify as a QALICB, a business must meet specific statutory requirements related to its operations in low-income communities, including deriving at least 50% of gross income from active business conduct within these communities, maintaining at least 40% of employees working in low-income communities, or meeting alternative qualification tests for certain business types.
The Business Transaction typically involves the CDE providing capital to the QALICB through a loan, though equity investments or hybrid structures are also possible. The financing terms—interest rates, repayment schedules, security interests—reflect the subsidy provided by the tax credit, enabling more favorable terms than conventional financing would offer. A business might receive a loan at 2% annual interest when market rates stand at 7%, or benefit from interest-only payments for several years to ease cash flow during growth phases.
Geographic Eligibility: Qualifying Low-Income Communities
The NMTC program targets investment toward economically distressed areas defined as low-income communities using census tract data. Understanding what are New Market Tax Credits and how do they work for businesses must include understanding where businesses must be located to access NMTC financing.
Census tracts qualify as low-income communities if they meet one of two criteria: the tract has a poverty rate of at least 20%, or the tract has median family income at or below 80% of the greater of the metropolitan area or statewide median family income. These objective criteria ensure consistent application of geographic targeting while directing capital to areas experiencing genuine economic distress.
Businesses seeking NMTC financing must verify that their operations, facilities, or projects are located within qualifying census tracts. The CDFI Fund provides online mapping tools where businesses can enter addresses and confirm whether specific locations fall within low-income communities eligible for NMTC investment. This geographic requirement is non-negotiable—projects outside qualifying areas cannot access NMTC financing regardless of their other merits or community benefits.
The low-income community definition encompasses diverse geographies including inner-city neighborhoods, industrial areas experiencing economic transition, rural communities with limited economic opportunity, and smaller towns across America facing persistent poverty or declining median incomes. This breadth means NMTC financing is available to businesses across varied settings, not just major metropolitan areas.
Business Qualification Requirements
Beyond location requirements, businesses must meet specific qualification criteria to receive NMTC financing and maintain that status throughout the seven-year compliance period. Understanding what are New Market Tax Credits and how do they work for businesses requires familiarity with these QALICB requirements.
The substantially-all test requires that at least 85% of the NMTC financing be used for qualified purposes within the low-income community. Qualified uses include tangible property located in low-income communities, payment for services performed in these communities, or other business activities substantially supporting the business’s operations in qualifying areas. Businesses must carefully track how they deploy NMTC proceeds and maintain documentation proving compliance with this requirement throughout the seven-year period.
The active business conduct requirement ensures that NMTC financing supports operating businesses rather than passive investments. Businesses must actively conduct trade or business operations, not merely hold property for investment or engage in passive activities. This requirement focuses NMTC capital on job-creating, community-serving enterprises rather than speculative real estate holdings or investment vehicles.
Prohibited business activities exclude certain business types from NMTC eligibility even if they meet location and active conduct requirements. Businesses primarily engaged in operating private or commercial golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks or gaming facilities, or liquor stores cannot receive NMTC financing. These exclusions reflect Congressional intent to direct NMTC capital toward businesses providing broader community benefits rather than specialized recreational or vice-related activities.
The Substantially-All Test and Use of Proceeds
One of the NMTC program’s most important and frequently misunderstood requirements involves the substantially-all test governing how businesses use NMTC financing. This requirement mandates that at least 85% of the aggregate gross assets of a QALICB must be qualified business property used in the active conduct of business within low-income communities.
For businesses receiving NMTC financing, this translates to strict requirements regarding capital deployment. If a business receives $10 million in NMTC financing, at least $8.5 million must be used for qualified purposes such as purchasing equipment located in the low-income community, constructing or renovating facilities in qualifying areas, or funding operations directly supporting business activities in these communities.
Understanding what are New Market Tax Credits and how do they work for businesses includes recognizing that improper use of proceeds can trigger compliance violations and credit recapture affecting not just the business but also the CDE and investors. Businesses must maintain detailed records documenting how NMTC proceeds are deployed and demonstrate ongoing compliance with the substantially-all test through periodic reporting and audits.
Common qualifying uses include real estate acquisition or development for business facilities, construction or renovation costs, furniture, fixtures, and equipment purchases, machinery and production equipment for manufacturing operations, information technology systems and infrastructure, and working capital directly supporting qualified business activities. Costs that don’t qualify include investments in securities, acquisition of existing businesses outside qualifying areas, or expenditures on activities outside low-income communities.
Types of Financing Available Through NMTC
NMTC capital can be structured in various ways depending on business needs, CDE investment strategies, and transaction-specific circumstances. Understanding what are New Market Tax Credits and how do they work for businesses requires recognizing the flexibility in financing structures.
Debt financing represents the most common NMTC structure. The CDE provides a loan to the business at below-market interest rates subsidized by the tax credit value. Interest rates might range from 0% to 4% annually—substantially below conventional commercial rates—with amortization periods, payment schedules, and other terms tailored to the business’s cash flow projections and growth plans. Some structures include interest-only periods allowing businesses to conserve cash during startup or expansion phases.
Equity investments involve the CDE taking ownership positions in businesses, though this structure appears less frequently than debt due to most businesses’ preference for maintaining full ownership control. When equity investments occur, they typically involve minority positions with defined exit provisions ensuring the business can eventually buy out the CDE investor or that the CDE can exit through other mechanisms.
Hybrid or quasi-equity structures combine debt and equity characteristics, potentially including subordinated debt with equity-like features, revenue participation arrangements, or convertible instruments. These flexible structures allow customization to specific business situations and risk profiles.
The specific financing structure depends on negotiations between the business and CDE, considering factors including the business’s credit profile, cash flow capacity, collateral availability, owner preferences regarding ownership dilution, and the CDE’s investment policies and risk management requirements.
The Seven-Year Compliance Period
NMTC financing involves a seven-year compliance period during which businesses must maintain QALICB status and satisfy ongoing program requirements. Understanding what are New Market Tax Credits and how do they work for businesses must include recognition of these long-term obligations.
Throughout this period, businesses must continue meeting the substantially-all test, maintain active business operations in low-income communities, avoid prohibited activities, and submit to periodic compliance monitoring by the CDE. The CDE conducts site visits, reviews financial statements, verifies ongoing qualification, and ensures businesses understand and meet their compliance obligations.
Compliance violations can trigger recapture of tax credits previously claimed by investors, creating significant financial consequences. The potential recapture affects not only the business but also the CDE and investors who relied on credit claims. This shared risk creates strong alignment among all parties to maintain strict compliance throughout the seven-year period.
While compliance obligations create administrative burdens and restrict certain business activities—such as relocating outside qualifying areas or changing business models in ways that would jeopardize QALICB status—they represent manageable commitments for businesses planning to maintain operations in their communities and continue serving the markets that NMTC financing helps them access.
Application Process and Timeline
Businesses seeking NMTC financing don’t apply directly to the federal government but instead approach CDEs that have received allocation authority or plan to pursue allocations in upcoming competitive rounds. The application process involves identifying appropriate CDE partners whose investment criteria, geographic focus, and industry specialization align with the business’s profile.
Businesses submit applications to CDEs that typically include comprehensive business plans, detailed financial projections, market studies, management team backgrounds, proof of QALICB qualification, and documentation of community impact potential. The CDE conducts due diligence similar to conventional lenders—evaluating credit risk, business viability, management capability, and market opportunity—while also assessing community impact, job creation potential, and mission alignment.
The timeline from initial CDE contact to financing closing commonly spans six to twelve months or longer, reflecting the complexity of NMTC transactions and the multiple parties involved. Businesses should begin exploring NMTC options well in advance of capital needs to accommodate this extended process.
Benefits Beyond Capital Access
Understanding what are New Market Tax Credits and how do they work for businesses extends beyond the direct financing to recognize additional benefits. CDE relationships often provide technical assistance, networking opportunities, industry connections, and strategic support beyond pure capital provision. Many CDEs bring specialized expertise in specific industries or community types, providing value that enhances business success beyond the financing itself.
The NMTC program represents a powerful tool for businesses in economically distressed communities to access capital, achieve growth objectives, and contribute to broader community revitalization—creating shared prosperity that benefits businesses, communities, and the economy alike.