Background and Overview of the New Markets Tax Credit Program Low-income communities in the United States often face obstacles to sustainable
growth and economic prosperity—a problem particularly widespread in Appalachia.
Appalachian communities have problems attracting private investment such as
debt and equity, or ownership stakes, in companies. These gaps in the availability
of equity capital for businesses exist across the nation, according to research
conducted by the Federal Reserve Board, Appalachian Regional Commission, and
Economic Research Service of the U.S. Department of Agriculture.
The New Markets Tax Credit (NMTC), administered through the U.S. Treasury Department's
Community Development Financial Institutions (CDFI) Fund, was designed to stimulate
private sector investment in the economic development of low-income communities.
Through the NMTC Program, taxpayers receive a credit against federal income
taxes for making equity investments in Community Development Entities (CDEs),
which, in turn, will make debt and equity investments in low-income areas. Investors Benefit from Tax Credits and Capital Incentives
Investors receive an annual tax credit equal to five percent of the amount
they invest in the CDE for each of the first three years, and six percent for
each of the following four years, for a total of 39 percent over the seven-year
life of the tax credit. The CDFI Fund will allocate tax credits annually to
CDEs under a competitive application process.
In addition to the tax credit, investors may receive a cash return during the
life of the CDE, based on its profitability. This cash return may be a distribution
of available cash after payment of the CDE's expenses (including a management
fee to the CDE's sponsor). Alternatively, the cash return could be structured
as a fixed quarterly or annual interest or dividend disbursement, or as a deferred
payment, based on the CDE's performance.
The investor's basis in its investment in the CDE will be reduced by
the amount of tax credits taken; thus, the investor may owe capital gains tax
when interest in the CDE is sold or redeemed.
As With Any Investment, There are Risks to Investors
Risks to investors include the underlying credit risk on the pool of assets
in which the money is invested, and the loss of tax credit and penalties if
the CDE fails to meet NMTC requirements.
Qualifying for Tax Credits
To qualify for the tax credits, investors must purchase equity in a for-profit
CDE that invests roughly 85 percent of its capital in qualifying loans, commercial
real estate development, and businesses located in low-income communities. Non-profit
organizations can also form for-profit subsidiaries or affiliates in order to
qualify. CDEs are typically structured as a Limited Liability Company (LLC)
or partnership in which an investor purchases an ownership stake.
Qualifying as a Community Development Entity
To qualify as a CDE, an entity must be a domestic corporation or partnership
that
- has a mission of serving or providing investment capital for low-income
communities or low-income persons;
- maintains accountability to residents of low-income communities through
their representation on a governing board of or advisory board to the entity;
and
- has been certified as a CDE by the CDFI Fund. Existing Community Development
Financial Institutions automatically qualify as CDEs.
To learn more about the NMTC Program, and to obtain application materials for
CDE certification, visit the CDFI Fund's site.
Allocations of Tax Credits Across the Nation
The NMTC Program is expected to continue for seven years, according to President
Bush's fiscal year 2004 budget. Applications are no longer being accepted
for the 2003 New Markets Tax Credit allocation.
National Tax Credit Allocations Went to 66 CDEs in 2002
In March 2003, 66 CDEs were selected to receive $2.5 billion in tax credit
allocations for 2002. Approximately 20 percent ($500 million) of the allocations
target rural communities, while 80 percent ($2 billion) target urban or suburban
areas.
Allocations Nationwide
- The average New Markets recipient received a tax credit of $37.9 million,
with 12 funds receiving $75 million or more.
- The largest allocation was $170 million to a local fund in Arizona; the
smallest, $500,000, to a local fund in Pittsburgh.
- Fifteen funds with national focus received allocations of almost $1.2 billion.
- Twenty-two funds with local focus received allocations of $590 million.
Recipients of Tax Credits Are Diverse
Recipients of the tax credits include subsidiaries of leading financial institutions
like Goldman Sachs, Wachovia, Key Bank, CF Bancorp, and GMAC, as well as leading
community development lenders like Self Help, Kentucky Highlands, Enterprise
Corporation of the Delta, the Community Reinvestment Fund, and LISC.
View a list of allocation recipients.
New Markets Programs in Appalachia Nearly Half of Appalachia is Eligible for Tax Credits
Approximately 45 percent of Appalachia is eligible to use the New Markets Tax
Credits, including over 50 percent of Appalachian Kentucky, Maryland, New York,
Ohio, and Virginia. Contact ARC for a list of eligible census tracts
in Appalachia.
Eight Appalachian States Benefited from 2002 Tax Credits
Of the 66 recipients of the 2002 NMTC allocations, six recipients from Appalachia
received $49.5 million (2 percent of total allocations) to exclusively target
Appalachian communities in Alabama, Georgia, Kentucky, Mississippi, Ohio, Pennsylvania,
Tennessee, and West Virginia.
Allocations in Appalachia:
- Approximately 11 percent ($5.3 million) of these allocations target rural
communities in Appalachia, while 89 percent ($44.2 million) target urban or
suburban areas in Appalachia.
- Six recipients for statewide programs that partially target Appalachian
communities received $45 million in tax credits.
- Fifteen recipients for national programs that partially targeted Appalachian
communities were given $1 billion in tax credits.
Questions about New Markets Tax Credits?
Contact the following ARC staff:
Ray Daffner
Email: rdaffner@arc.gov
Phone: (202) 884-7777
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