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. The New Markets Tax Credit (NMTC) program offers a powerful solution to this capital access problem by incentivizing private investment in low-income communities. Understanding what NMTC is and how it works for businesses helps entrepreneurs identify whether this federal program can support their growth objectives while revitalizing the communities they serve.
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 of 2000. 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.
The NMTC program offers a 39% federal tax credit to investors who make qualified equity investments in specialized financial intermediaries known as 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.
How the Program Works: Multi-Party Structure
Understanding NMTC requires comprehending the program’s multi-party structure, which involves several key players. Community Development Entities serve as the linchpin of the program. CDEs are specialized organizations certified by the Community Development Financial Institutions Fund (CDFI Fund)—the federal agency administering the NMTC program. CDEs compete for NMTC allocation authority through competitive application rounds. 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.
Tax credit investors—typically corporations, financial institutions, or high-net-worth individuals with substantial federal income tax liability—make qualified equity investments in CDFIs and 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 businesses that receive financing through NMTC capital. To be eligible as a QALICB, a company 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 or maintaining at least 40% of employees working in low-income communities.
Geographic Eligibility Requirements
The NMTC program targets investments toward economically distressed areas, defined as low-income communities, using census tract data. 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 a median family income at or below 80% of the greater of the metropolitan area or statewide median family income.
Businesses seeking NMTC financing must verify that their operations, facilities, or projects are located within qualifying census tracts. The CDFI Fund offers online mapping tools that allow businesses to enter addresses and verify 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.
Business Qualification and the Substantially-All Test
Beyond location requirements, businesses must meet specific qualification criteria to receive NMTC financing and maintain that status throughout the seven-year compliance period. 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.
The active business conduct requirement ensures that NMTC financing supports operating businesses rather than passive investments. Businesses must actively conduct trade or business operations, rather than merely holding property for investment or engaging in passive activities. This requirement focuses NMTC capital on job-creating, community-serving enterprises.
Prohibited business activities exclude certain business types from NMTC eligibility. Businesses primarily engaged in operating golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks, or gaming facilities, or liquor stores are not eligible to receive NMTC financing. These exclusions reflect congressional intent to direct NMTC capital toward businesses that provide broader community benefits.
Types of Financing Available
NMTC capital can be structured in various ways depending on business needs and CDE investment strategies. 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 and payment schedules tailored to the business’s cash flow projections and growth plans.
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 complete ownership control. Hybrid or quasi-equity structures combine debt and equity characteristics, potentially including subordinated debt with equity-like features, revenue participation arrangements, or convertible instruments.
Seven-Year Compliance Period
NMTC financing involves a seven-year compliance period during which businesses must maintain QALICB status and satisfy ongoing program requirements. Throughout this period, companies must continue meeting the substantially all test, support active business operations in low-income communities, avoid prohibited activities, and submit to periodic compliance monitoring by the CDE.
Compliance violations can result in the recapture of tax credits previously claimed by investors, leading to 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 fosters strong alignment among all parties to maintain strict compliance throughout the seven years. Reviewing successful CBO projects demonstrates how businesses effectively manage compliance obligations.
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 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.
Benefits Beyond Capital Access
NMTC benefits extend beyond direct financing to include additional advantages. 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 through expert NMTC services.
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. To explore whether NMTC financing aligns with your business needs, request a project evaluation from experienced community development finance professionals who can guide you through the qualification and application process.