Businesses exploring the New Markets Tax Credit (NMTC) Program as a financing tool inevitably encounter questions about limitations and restrictions governing how much funding they can access. While the program offers substantial benefits, understanding the various constraints that apply is essential for realistic planning and expectation setting. The question “are there limits on the amount I can claim through New Market Tax Credits?” has multiple dimensions, as limits exist at federal, state, Community Development Entity (CDE), and individual project levels. Navigating these various restrictions requires understanding how they interact and affect practical access to NMTC benefits.
Understanding the Nature of NMTC Claims
Before examining specific limits, it’s crucial to clarify what “claiming” means in the NMTC context. Unlike many tax credits that taxpayers claim directly based on their activities or expenditures, NMTCs are claimed by investors who make Qualified Equity Investments (QEIs) in certified CDEs. The operating businesses receiving financing from CDEs do not directly claim the credits on their tax returns.
This structure means that when businesses ask “are there limits on the amount I can claim through New Market Tax Credits?”, they’re really asking about limits on the amount of NMTC-subsidized financing they can access. The actual credit claiming occurs at the investor level, while businesses benefit indirectly through below-market interest rates enabled by investor credits.
Investors claim credits equal to 39% of their QEI amount over seven years: 5% annually for the first three years and 6% annually for the final four years. These percentages are fixed and apply uniformly to all NMTC transactions, so investors making a $10 million QEI will claim exactly $3.9 million in credits according to this schedule. There is no limit on the total credits an individual investor can claim across multiple NMTC investments, though their ability to use credits depends on their tax liability.
Federal Program Allocation Limits
The most significant limitation on NMTC access involves the total amount of allocation authority the Community Development Financial Institutions (CDFI) Fund awards annually. Congress establishes these funding levels, which have varied considerably over the program’s history. Recent years have seen annual allocations ranging from $3.5 billion to $5 billion in new allocation authority.
Understanding are there limits on the amount I can claim through New Market Tax Credits at the program level requires recognizing that total annual allocation authority constrains how much NMTC-subsidized financing is available across all projects nationwide. When demand exceeds supply, as frequently occurs, competition for allocations intensifies and some worthy projects cannot access NMTC financing simply because insufficient allocation exists.
The CDFI Fund awards allocation authority through a competitive application process to CDEs. These awards typically range from $20 million to $100 million per CDE, though some well-established organizations receive larger amounts. The total number of CDEs receiving awards each year varies, but typically 60 to 100 organizations share the available allocation pool.
Once allocation authority is awarded, CDEs have five years to deploy their allocations before they expire, though most CDEs invest their allocations within two to three years. This creates a rolling availability of NMTC capacity, with new awards each year adding to undeployed allocations from previous years. Tracking which CDEs have available allocation and when they plan to deploy it becomes crucial for businesses seeking NMTC financing.
Individual CDE Allocation Limits
From the business perspective, understanding are there limits on the amount I can claim through New Market Tax Credits requires examining constraints at the CDE level. Each CDE can only invest up to its available allocation authority, creating practical limits on how much financing individual CDEs can provide.
A CDE with $50 million in allocation authority cannot finance projects totaling more than $50 million in NMTC investments, regardless of how many worthy projects exist. This constraint means businesses must identify CDEs with sufficient available allocation to accommodate their project size, or potentially work with multiple CDEs to assemble the necessary allocation.
CDEs also typically impose their own per-project limits based on portfolio diversification strategies and risk management considerations. Many CDEs limit individual project allocations to 10% to 25% of their total allocation authority to avoid concentration risk. A CDE with $50 million in total allocation might cap individual projects at $5 million to $12.5 million, even if larger allocations would otherwise make economic sense.
These self-imposed CDE limits reflect prudent portfolio management but create challenges for larger projects requiring substantial NMTC allocations. Projects needing $15 million to $20 million in NMTC financing may need to engage multiple CDEs, each providing a portion of the total requirement. This multi-CDE structuring adds complexity and cost but enables access to larger aggregate allocations than any single CDE could provide.
Geographic and Census Tract Limitations
The NMTC Program restricts investments to low-income communities defined by specific criteria based on poverty rates, median family income, or population decline. Only projects located in qualifying census tracts or serving populations from these areas can receive NMTC financing, creating geographic limitations on program access.
Understanding are there limits on the amount I can claim through New Market Tax Credits includes recognizing that projects in non-qualifying locations cannot access the program at all, regardless of their merits or financing needs. Businesses must verify that their project location qualifies before investing time and resources in pursuing NMTC financing.
Some CDEs further restrict their geographic focus beyond federal requirements, concentrating on particular states, regions, or urban versus rural areas. These mission-driven geographic limitations mean that qualifying projects in certain areas may have fewer CDE options, effectively limiting available allocation capacity.
Census tract designations change periodically based on updated demographic data, creating uncertainty for projects in marginal areas. A location qualifying today might not qualify when designations are updated, affecting projects in development stages. Businesses should verify current qualification status and understand timing risks related to potential designation changes.
Qualified Active Low-Income Community Business Requirements
Beyond location restrictions, NMTC investments must flow to Qualified Active Low-Income Community Businesses (QALICBs) meeting specific operational requirements. These requirements effectively limit which businesses can access NMTC financing, regardless of allocation availability.
To qualify as a QALICB, businesses must derive at least 50% of gross income from active business operations within low-income communities, employ a substantial portion of their workforce in such communities, or have a substantial portion of their property located in qualifying areas. Additionally, certain business types are categorically excluded, including private country clubs, golf courses, massage parlors, hot tub facilities, suntan facilities, race tracks, and gambling operations.
Businesses primarily engaged in farming, raising, harvesting, or growing timber may face limitations. Rental real estate operations must meet specific use requirements. These operational restrictions effectively limit which projects can claim NMTC financing, even when allocation authority is available and project locations qualify geographically.
Investor Tax Liability Limitations
From the investor perspective, understanding are there limits on the amount I can claim through New Market Tax Credits involves recognizing that credits can only offset actual tax liability. The NMTC is a non-refundable credit, meaning investors receive benefit only to the extent they have federal income tax liability to offset.
An investor with $1 million in annual federal income tax liability can effectively use $1 million in NMTC credits each year but gains no benefit from additional credits beyond this amount. This constraint affects the economics of NMTC investments and influences how investors structure their portfolios and commitments.
Tax liability limitations particularly affect individual investors versus corporate or institutional investors. Large corporations with substantial ongoing tax liabilities can efficiently absorb significant NMTC credit flows, while individual investors may struggle to use credits effectively unless they have very high incomes generating corresponding tax obligations.
Passive activity loss rules, alternative minimum tax considerations, and other tax code complexities can further constrain investors’ ability to use credits efficiently. These technical tax limitations affect investor demand for NMTC allocations, which in turn influences the economics available to businesses seeking NMTC financing.
Practical Project Size Limitations
Beyond regulatory limits, practical considerations constrain are there limits on the amount I can claim through New Market Tax Credits. Transaction costs create minimum project sizes below which NMTC economics don’t work effectively. Legal, accounting, CDE, and syndication fees typically total $750,000 to $1.5 million or more, making projects under $3 million to $5 million in total cost difficult to justify from a cost-benefit perspective.
The relationship between total project costs and available NMTC allocation also creates practical limits. As discussed in previous analyses, NMTC financing typically covers 20% to 40% of total project costs after accounting for transaction expenses. A business requiring $10 million in total project funding might access $3 million to $4 million through NMTCs but must secure the remaining $6 million to $7 million from other sources.
This capital stacking requirement effectively limits NMTC access for businesses lacking ability to raise complementary financing. A worthy project in a qualifying location might still fail to secure NMTC financing if the business cannot demonstrate ability to cover the portion of costs NMTCs don’t address.
State-Level New Markets Tax Credit Programs
Several states have established their own NMTC programs modeled after the federal program but with independent allocation pools and rules. Understanding are there limits on the amount I can claim through New Market Tax Credits requires examining both federal and state programs, as they can be layered to increase total available subsidized financing.
State NMTC programs typically offer additional credits calculated as a percentage of the federal QEI, often 20% to 50% of the federal credit amount. These state credits have their own allocation caps, geographic requirements, and operational restrictions that may differ from federal rules.
A project might access both federal and state NMTCs, effectively increasing the total subsidy available and improving overall economics. However, not all states offer NMTC programs, and those that do typically have much smaller allocation pools than the federal program, limiting availability.
Multi-Project and Portfolio Limitations
Businesses operating multiple locations or pursuing phased development might wonder whether are there limits on the amount I can claim through New Market Tax Credits across multiple projects. Generally, no formal limit restricts how many different NMTC-financed projects a single business can pursue, though practical constraints apply.
Each project must independently qualify based on location, QALICB status, and other requirements. CDEs evaluate projects individually and may be reluctant to concentrate too much of their portfolio with a single borrower, even across multiple projects. A business with one successful NMTC-financed project might find it easier to secure additional allocations for future projects based on demonstrated track record, but this advantage doesn’t guarantee unlimited access.
Timing constraints also affect multi-project strategies. Businesses must allow sufficient time between projects for proper structuring, closing, and compliance establishment before pursuing additional NMTC financing. Attempting to close multiple NMTC transactions simultaneously creates operational complexity that few businesses can manage effectively.
Allocation Recapture and Availability
CDEs that fail to deploy their allocation authority within the five-year deployment period may have unused allocation recaptured by the CDFI Fund, returning it to the pool for future awards. Understanding this dynamic helps explain why allocation availability fluctuates and why CDEs with approaching expiration dates may be particularly motivated to close deals.
Businesses seeking NMTC financing should inquire about CDE allocation expiration timelines. CDEs with allocations nearing expiration may offer more favorable terms or move more quickly to deploy remaining capacity before it’s lost. However, rushed transactions carry risks, so businesses should maintain appropriate diligence standards regardless of CDE urgency.
Strategic Planning Around Limits
Given the various limits affecting NMTC access, businesses should plan strategically to maximize their chances of securing desired financing. This includes identifying multiple potential CDE partners to avoid dependence on any single allocation source, timing project development to align with allocation availability, and structuring projects to meet multiple CDE missions for broader appeal.
Understanding are there limits on the amount I can claim through New Market Tax Credits and planning accordingly prevents disappointing surprises late in the development process. Businesses should verify qualification early, assess realistic allocation amounts based on project characteristics and market conditions, and develop contingency financing plans for scenarios where desired NMTC allocations prove unavailable.
Engaging experienced NMTC consultants early in project planning helps navigate the complex landscape of limits and restrictions. These professionals understand current allocation availability, CDE preferences and capacities, and strategies for maximizing access to limited NMTC resources in competitive environments.
Conclusion
Multiple limits constrain access to NMTC financing, operating at federal program, individual CDE, investor, project, and geographic levels. While the program offers substantial benefits for qualifying projects, understanding these limitations is essential for realistic planning and expectation management. Total annual federal allocation authority caps system-wide availability, individual CDE allocations limit per-project access, geographic and business type restrictions constrain eligibility, and practical considerations around transaction costs and capital stacking create effective minimum and maximum project sizes. By thoroughly understanding these various limits and planning strategically to work within them, businesses can maximize their chances of successfully accessing this valuable financing tool for projects that meet program requirements and advance community development objectives.