The New Markets Tax Credit (NMTC) program has channeled billions of dollars in investment capital to economically distressed communities since 2000, supporting diverse businesses, creating jobs, and catalyzing community development. However, not every company or investor can participate in the program. The NMTC framework includes specific eligibility criteria that determine who qualifies and what requirements businesses, investors, and intermediary organizations must meet to participate successfully. Understanding these qualification requirements helps potential participants assess whether they are eligible for NMTC benefits and what steps they must take to meet program standards.
Community Development Entity Eligibility
The NMTC program operates through Community Development Entities (CDEs), which serve as crucial intermediaries between tax credit investors and businesses receiving financing. To qualify as a CDE, an organization must meet statutory requirements established by Congress and implemented by the Community Development Financial Institutions Fund (CDFI Fund).
The organization must be a domestic corporation or partnership at the time of certification. This requirement excludes foreign entities and sole proprietorships from CDE status, though partnerships, including limited liability companies taxed as partnerships, can qualify. The primary mission requirement mandates that the CDE’s principal purpose include serving or providing investment capital to low-income communities or individuals. This mission must be clearly articulated in the organization’s governing documents, strategic plans, and operational practices.
The accountability requirement ensures that CDEs maintain connections to the communities they serve. At least 20% of governing board members or advisory board members must include residents of low-income communities, representatives of community groups, or other individuals providing accountability to low-income community residents. This accountability requirement distinguishes CDEs from conventional financial institutions by ensuring community input into investment decisions and organizational governance.
Qualified Active Low-Income Community Business Requirements
Businesses seeking NMTC financing must qualify as Qualified Active Low-Income Community Businesses (QALICBs) throughout the seven-year compliance period. The gross income test requires that at least 50% of the business’s total gross income be derived from the active conduct of a qualified business within a low-income community. This test ensures that businesses receiving NMTC financing actually operate in and serve economically distressed areas.
The Employee Services Test offers an alternative qualification path, requiring that at least 40% of the business’s employees provide services in low-income communities. Measuring this test involves calculating the proportion of total employee hours, days, or full-time equivalent positions dedicated to work performed in low-income communities.
The tangible property test offers an alternative qualification, requiring that at least 40% of the business’s use of tangible property be located in low-income communities. Tangible property includes real estate, equipment, machinery, inventory, furniture, fixtures, and other physical assets the business uses in operations. Working with experienced CDFI and CDE partners helps companies to understand which qualification test best suits their operations.
The Substantially-All Test for Asset Deployment
Beyond initial QALICB qualification, businesses must satisfy the substantially all test, requiring that at least 85% of the aggregate gross assets of the QALICB be qualified business property. Qualified business property includes tangible property used in the active conduct of the qualified business within a low-income community, provided the property was either purchased or substantially improved using NMTC proceeds.
The 85% threshold applies to the business’s aggregate gross assets, requiring careful asset management and ongoing monitoring. If a company receives $10 million in NMTC financing and has total assets of $12 million, at least $10.2 million (85%) of those assets must constitute qualified business property. This requirement creates practical constraints on business operations during the compliance period. Businesses cannot accumulate substantial cash balances, make significant investments in securities, or acquire major assets outside low-income communities without jeopardizing compliance.
Geographic Qualification: Low-Income Community Definitions
Both CDEs and businesses must engage with low-income community geography to participate in the NMTC program. Census tracts qualify as low-income communities if they meet one of two statutory tests. The poverty rate test qualifies tracts where at least 20% of the population lives below the federal poverty line. The median family income test qualifies tracts where the median family income is at or below 80% of the greater of the metropolitan area median family income or the statewide median family income.
The CDFI Fund provides an online Low-Income Community (LIC) Database Tool allowing users to search addresses, census tracts, or geographic areas to determine qualification status. Businesses can verify whether their facilities, proposed projects, or target markets are located in qualifying communities before pursuing NMTC financing. Geographic qualification is not negotiable—projects must be located in qualifying census tracts to receive NMTC financing.
Prohibited Business Activities and Limitations
The NMTC statute and regulations specifically prohibit certain business activities from receiving financing even if they meet location and other qualification requirements. Prohibited businesses include those primarily engaged in operating private or commercial golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks, or other facilities used for gambling, or stores the principal business of which is the sale of alcoholic beverages for consumption off premises.
The “principal business” language means that businesses engaging in prohibited activities as secondary or minor aspects of broader operations may still qualify. A hotel with a small suntan facility or a restaurant with limited off-premises alcohol sales wouldn’t necessarily be disqualified if these activities don’t constitute the primary business purpose. Residential rental property limitations also restrict NMTC financing for residential real estate, distinguishing NMTC from programs such as the Low-Income Housing Tax Credits (LIHTC).
Investor Eligibility and Tax Capacity Requirements
Tax credit investors must meet specific requirements to participate in NMTC investments and benefit from the 39% credit. The fundamental investor requirement involves having a federal income tax liability against which to claim credits. The NMTC provides a credit against federal income taxes, creating value only for taxpayers with sufficient tax obligations. Corporations subject to federal corporate income tax, individuals with substantial federal income tax liability, and certain pass-through entities whose owners pay federal income taxes represent appropriate investor candidates.
Tax-exempt organizations, including foundations, pension funds, and nonprofit entities, cannot benefit from NMTC investments because they have no federal income tax liability to reduce. Investors must make qualified equity investments in CDEs, and most NMTC investment funds establish minimum investment amounts—typically $500,000 to $2 million or more—based on transaction economics.
Special Considerations for Different Entity Types
Different business structures face unique considerations regarding NMTC qualification. For-profit corporations and partnerships represent the most straightforward QALICB candidates. Nonprofit organizations can qualify as QALICBs if they meet the active business conduct requirement. Tax-exempt status doesn’t disqualify organizations from receiving NMTC financing; however, the lack of equity ownership interests may necessitate structuring financing as debt rather than equity investments.
Real estate development entities qualify if they meet the QALICB tests and use NMTC proceeds for the development of qualified property in low-income communities. Franchise businesses and chains can be eligible provided their locations meet geographic requirements and they satisfy QALICB tests. Reviewing successful CBO project examples demonstrates how diverse entity types navigate qualification requirements.
Maintaining Qualification Throughout Compliance
Initial qualification represents only the first step—businesses must maintain QALICB status throughout the seven-year compliance period. Businesses must continuously satisfy the substantially all test, support operations in low-income communities, avoid prohibited activities, and preserve the active business conduct that justified initial qualification.
Material changes to business operations, relocations outside qualifying areas, significant asset acquisitions outside low-income communities, or shifts toward prohibited activities can jeopardize compliance and trigger credit recapture. This ongoing requirement necessitates coordination with CDEs throughout the compliance period, regular reporting and documentation, and periodic compliance audits. Working with experienced new market tax credit consultants helps businesses maintain compliance and avoid recapture risks.
Understanding eligibility criteria comprehensively enables potential participants to assess their qualification prospects, prepare the necessary documentation, and structure their operations to maintain compliance. To evaluate whether your organization qualifies for NMTC financing, request a qualification assessment from community development finance professionals who can guide you through program requirements and application processes.