The New Market Tax Credit (NMTC) program has channeled billions of dollars in investment capital to economically distressed communities since its establishment in 2000, supporting diverse businesses, creating jobs, and catalyzing community development across urban, suburban, and rural America. However, not every business or investor can participate in the program. The NMTC framework includes specific eligibility criteria that determine who qualifies for New Market Tax Credits and what are the eligibility criteria that businesses, investors, and intermediary organizations must meet to participate successfully. Understanding these qualification requirements helps potential participants assess whether they can access NMTC benefits and what steps they must take to meet program standards.
Community Development Entity Eligibility and Certification
The NMTC program operates through Community Development Entities (CDEs), which serve as the crucial intermediaries between tax credit investors and businesses receiving financing. Understanding who qualifies for New Market Tax Credits and what are the eligibility criteria begins with CDE requirements, as these organizations must qualify before they can deploy NMTC capital.
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, sole proprietorships, and most unincorporated associations 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 for low-income communities or low-income persons. This mission must be clearly articulated in the organization’s governing documents, strategic plans, and operational practices. The CDFI Fund evaluates whether the mission truly represents the organization’s primary purpose rather than a secondary or incidental objective.
The accountability requirement ensures that CDEs maintain connections to the communities they serve. The organization must demonstrate accountability to residents of low-income communities through representation on governing or advisory boards. 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. A bank seeking CDE certification might establish an advisory board including community representatives, nonprofit leaders serving low-income populations, and residents of target communities to satisfy this requirement.
CDEs must apply for certification through the CDFI Fund, submitting documentation proving they meet statutory requirements. Once certified, CDEs maintain ongoing certification provided they continue satisfying the mission and accountability requirements. This certification represents a prerequisite for competing for NMTC allocations but doesn’t guarantee receiving allocations—CDEs must subsequently compete in allocation rounds to receive authority to issue tax credits.
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. Understanding who qualifies for New Market Tax Credits and what are the eligibility criteria requires detailed examination of QALICB requirements that determine business eligibility.
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 rather than merely having nominal presence while conducting primary operations elsewhere.
Calculating the gross income test involves examining the business’s revenue sources and determining what portion derives from activities conducted in low-income communities. A manufacturing business with production facilities in a qualifying census tract generating 60% of its revenues from those operations would satisfy this test, while a business with only administrative offices in low-income communities but primary operations elsewhere likely would not.
The employee services test provides an alternative qualification path, requiring that at least 40% of the business’s employees’ services be performed in low-income communities. This test accommodates businesses whose operations involve work performed in qualifying areas but whose income attribution might not clearly satisfy the gross income test.
Measuring the employee services test involves calculating the proportion of total employee hours, days, or full-time equivalent positions dedicated to work performed in low-income communities. A healthcare organization with multiple facilities might satisfy this test if at least 40% of its staff work at clinics located in qualifying census tracts, even if administrative functions and some service delivery occur elsewhere.
The tangible property test offers another qualification alternative, requiring that at least 40% of the business’s use of tangible property be located in low-income communities. This test suits businesses with significant physical assets concentrated in qualifying areas.
Tangible property includes real estate, equipment, machinery, inventory, furniture, fixtures, and other physical assets the business uses in operations. A retailer with stores in multiple locations satisfies this test if at least 40% of its total tangible property—measured by cost basis, fair market value, or other reasonable methods—is located in low-income community stores.
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. Understanding who qualifies for New Market Tax Credits and what are the eligibility criteria includes comprehending this critical ongoing requirement.
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. Property must be used in a qualifying manner throughout the compliance period to maintain its qualified status.
The 85% threshold applies to the business’s aggregate gross assets, requiring careful asset management and ongoing monitoring. If a business 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. Assets falling outside this definition—securities, property located outside low-income communities, or assets not used in active business operations—can comprise no more than 15% of total assets.
This requirement creates practical constraints on business operations during the compliance period. Businesses cannot accumulate substantial cash balances, make significant investments in securities or passive holdings, or acquire major assets outside low-income communities without jeopardizing compliance. These restrictions require businesses to carefully plan asset deployments, maintain appropriate asset composition, and coordinate with CDEs regarding any significant changes to asset profiles.
Geographic Qualification: Low-Income Community Definitions
Both CDEs and businesses must engage with low-income community geography to participate in the NMTC program. Understanding who qualifies for New Market Tax Credits and what are the eligibility criteria requires knowing how low-income communities are defined and identified.
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. This test identifies areas experiencing concentrated poverty where economic opportunity is severely limited and capital investment is most needed.
The median family income test qualifies tracts where median family income is at or below 80% of the greater of the metropolitan area median family income or the statewide median family income. This test captures communities where residents earn substantially less than their regional peers, indicating economic distress even if absolute poverty rates don’t reach 20%.
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.
Some census tracts qualify as low-income communities through special provisions even if they don’t meet poverty or income tests. Tracts located in counties or metropolitan areas with low population densities, tracts within certain targeted areas designated by other federal programs, or tracts meeting modified criteria may qualify through these alternative provisions.
Geographic qualification is not negotiable—projects must be located in qualifying census tracts to receive NMTC financing. Businesses located just outside qualifying boundaries, even in economically distressed areas that narrowly miss qualification thresholds, cannot access NMTC capital unless they relocate into qualifying tracts or structure transactions that concentrate qualifying activities within appropriate geography.
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. Understanding who qualifies for New Market Tax Credits and what are the eligibility criteria includes knowing these exclusions.
Per se 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. These exclusions reflect Congressional determinations that these business types don’t align with NMTC program objectives of promoting broad-based economic development and job creation in low-income communities.
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 restrict NMTC financing for residential real estate. While the program can support mixed-use developments with residential components, purely residential rental projects generally don’t qualify as QALICBs. This limitation distinguishes NMTC from programs like Low-Income Housing Tax Credits (LIHTC) specifically targeting residential development.
Size and operational standards may effectively exclude very large businesses or those with operations predominantly outside low-income communities even if technically meeting statutory tests. CDEs commonly establish maximum revenue, asset, or employee thresholds ensuring NMTC capital serves businesses genuinely needing subsidized financing rather than large corporations that could access conventional capital markets.
Investor Eligibility and Tax Capacity Requirements
Tax credit investors must meet specific requirements to participate in NMTC investments and benefit from the 39% credit. Understanding who qualifies for New Market Tax Credits and what are the eligibility criteria includes examining investor qualification standards.
The fundamental investor requirement involves having 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. While these organizations can participate in community development through other mechanisms, they cannot serve as tax credit investors or capture value from the NMTC structure.
Investors must make qualified equity investments in CDEs, which represent equity investments in entities classified as corporations or partnerships for federal tax purposes. The investment must be made for the exclusive purpose of acquiring stock, partnership interests, or capital interests in the CDE, and the investor must have a reasonable expectation of receiving the tax credits.
Minimum investment thresholds reflect transaction economics rather than statutory requirements. Most NMTC investment funds establish minimum investment amounts—typically $500,000 to $2 million or more—based on the fixed costs of administering investor relationships and the desire to limit the number of investors requiring coordination and communication.
Special Qualification 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, as their business operations and organizational structures align naturally with program requirements.
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, though the lack of equity ownership interests may require structuring financing as debt rather than equity investments. Community health centers, performing arts organizations, workforce development nonprofits, and community facilities operated by tax-exempt entities have successfully received NMTC financing.
Real estate development entities qualify if they meet QALICB tests and use NMTC proceeds for qualified property development in low-income communities. Mixed-use developments, commercial properties, community facilities, and revenue-generating real estate projects commonly receive NMTC financing structured through property-owning entities.
Franchise businesses and chains can qualify provided their locations meet geographic requirements and they satisfy QALICB tests. National or regional businesses expanding into low-income communities can access NMTC financing for those qualifying locations even if their broader operations span non-qualifying areas.
Maintaining Qualification Throughout the Compliance Period
Initial qualification represents only the first step—businesses must maintain QALICB status throughout the seven-year compliance period. Understanding who qualifies for New Market Tax Credits and what are the eligibility criteria includes recognizing ongoing obligations.
Businesses must continuously satisfy the substantially-all test, maintain 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, periodic compliance audits, and careful planning regarding business decisions that might affect qualification status. While these obligations create administrative burdens, they ensure NMTC benefits actually support sustained business operations in low-income communities rather than facilitating short-term presence followed by departure once financing is secured.
Understanding eligibility criteria comprehensively enables potential participants to assess qualification prospects, prepare appropriate documentation, structure operations to maintain compliance, and work effectively with CDEs and advisors to navigate program requirements successfully.