The New Markets Tax Credit (NMTC) program offers substantial benefits to businesses supporting economic development in low-income communities, but these benefits come with comprehensive restrictions and compliance requirements throughout the seven-year compliance period. Understanding these restrictions proves essential for informed decision-making and successful compliance management.
Geographic Restrictions: Low-Income Community Requirements
The NMTC program’s most fundamental restriction is the requirement to be located within qualified low-income communities. Projects outside qualifying census tracts cannot access NMTC financing regardless of their community benefit or business quality.
Census tract qualification requires that tracts meet one of the following criteria: poverty rate of at least 20% or median family income at or below 80% of the metropolitan area or statewide median family income. Businesses must maintain operations in qualifying communities throughout seven-year compliance periods and cannot relocate outside qualifying census tracts without triggering potential credit recapture.
Multi-location businesses face particular complexity. Businesses operating multiple locations must ensure sufficient operations occur within low-income communities to satisfy Qualified Active Low-Income Community Business (QALICB) tests—demonstrating that at least 50% of gross income, 40% of employees, or 40% of tangible property relates to qualifying locations.
Prohibited Business Activities
The NMTC statute explicitly prohibits financing for specific business types regardless of location. Prohibited businesses include those primarily engaged in operating private or commercial golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks or gambling facilities, and stores where the principal business involves selling alcoholic beverages for off-premises consumption.
The “principal business” qualification means businesses with minor involvement in these activities alongside substantial other operations may still qualify. A hotel with a small spa wouldn’t necessarily be disqualified if this doesn’t constitute the principal business purpose. Rental property restrictions also limit NMTC financing for purely residential rental real estate, though mixed-use developments may receive support for commercial portions.
The Substantially-All Test: Asset Deployment Requirements
The substantially all test represents one of the program’s most critical ongoing compliance obligations, requiring that at least 85% of a QALICB’s aggregate gross assets be qualified business property throughout the seven-year compliance period.
Qualified business property includes tangible property used in active business operations within low-income communities, provided the property was either used initially by the QALICB or substantially improved after acquisition. Cash accumulation restrictions arise because cash generally doesn’t qualify as qualified business property unless it represents working capital deployed in active business operations. Businesses cannot accumulate substantial cash reserves or maintain prominent liquid asset positions without risking violations.
Property location requirements mandate that qualified business property be located in low-income communities. Businesses cannot purchase significant property outside qualifying areas or relocate substantial assets beyond community boundaries without jeopardizing compliance. Continuous monitoring obligations require businesses to regularly track asset composition, verify qualified business property percentages, and maintain records demonstrating ongoing compliance.
QALICB Qualification Tests
Beyond the substantially all test, businesses must continuously satisfy QALICB qualification requirements. Initial qualification doesn’t ensure perpetual status—businesses must maintain qualifying characteristics throughout compliance periods.
The gross income test requires that at least 50% of total gross income be derived from active business activity within low-income communities. The employee services test provides an alternative requiring that at least 40% of employees’ services be performed within low-income communities. The tangible property test offers another alternative requiring that at least 40% of tangible property be located in low-income communities.
Businesses must continuously satisfy at least one of these three tests throughout seven-year periods. Failure to meet any test triggers non-qualification and potential credit recapture.
Ownership and Operational Restrictions
NMTC compliance imposes restrictions on business ownership changes, corporate restructuring, and operational modifications. Ownership transfer restrictions don’t prohibit the sale of businesses but create complexity when ownership changes. New owners must understand NMTC compliance obligations and ensure that ownership transitions don’t disrupt qualified business operations.
Corporate restructuring limitations constrain businesses’ ability to undertake mergers, acquisitions, or reorganizations without jeopardizing compliance. Business model evolution constraints limit dramatic shifts into different industries, prohibited activities, or operations outside low-income communities that risk violating qualification requirements.
Reporting and Documentation Requirements
NMTC compliance involves extensive reporting and documentation obligations throughout seven-year compliance periods. Quarterly or semi-annual reporting to Community Development Entities (CDEs) typically includes financial statements, asset schedules, employment reports, compliance certifications, and updates regarding material business changes.
Annual compliance certifications require businesses to formally certify the continuation of QALICB status, substantially all test satisfaction, and the absence of compliance violations. Site visit accommodation requirements obligate businesses to permit CDEs to conduct periodic site visits and verify compliance independently. Record retention obligations mandate maintaining comprehensive documentation supporting qualification throughout compliance periods, plus applicable retention periods.
Investment Structure and Use of Proceeds
Qualified equity investment requirements restrict how CDEs deploy NMTC capital. Investments must be equity interests in CDEs deployed to QALICBs according to strict timelines. CDEs must deploy NMTC allocations within 3 years of receiving them.
Use-of-proceeds restrictions prohibit using NMTC financing for distributions to owners, securities purchases, loans to related parties, passive investments, or activities outside low-income communities. Businesses must deploy capital to active business operations, qualified property acquisitions, or working capital supporting qualifying activities.
Recapture Provisions and Penalty Structures
Compliance violations trigger credit recapture—the most severe consequence of NMTC non-compliance. Recapture calculation requires investors to return previously claimed credits, plus interest, calculated from the date the credits were claimed initially. The recapture percentage follows a sliding scale, decreasing as compliance periods progress, but substantial recapture liability persists throughout most of the seven-year periods.
Multiple-party liability complicates recapture situations because violations affecting one transaction party can trigger consequences for all participants. If a business violates QALICB requirements, the CDE’s deployment may lose qualification, and investors may face recapture despite having no direct control over business operations.
Cure provisions and correction opportunities may exist depending on the nature of the violation and the transaction documentation. Some violations permit correction within specified timeframes if discovered promptly and addressed appropriately. However, not all violations are curable.
Strategies for Successful Compliance Management
Successfully navigating NMTC restrictions and compliance requirements requires systematic approaches combining strong internal systems, regular CDE coordination, experienced professional support, and proactive issue identification. Businesses should establish dedicated compliance management responsibilities with clear accountability for monitoring obligations, implement robust asset tracking and reporting systems, maintain open communication with CDEs regarding business developments, and conduct periodic internal compliance reviews.
For expert guidance navigating these complex requirements, explore our NMTC advisory services, review how other businesses have maintained compliance in our NMTC project portfolio, or request a free project analysis to assess your compliance readiness and risk management strategies.