New Markets Tax Credit Benefits Nonprofits

The New Markets Tax Credit (“NMTC”), under IRC §45D, was created as part of the Community Renewal Tax Relief Act of 2000. This act encouraged qualified equity investments (“QEIs”) in community development entities (“CDEs”) directed towards low-income communities. President Obama recently extended the NMTC in January of 2013 as a part of the American Taxpayer Relief Act of 2012. The NMTC rewards investors with a 39% tax credit of the total QEI, which is split over a seven year period. There is also additional return to investors who make a low-return project viable.

The CDEs also benefit with a 25% reduced cost of borrowing and lower interest rates than could otherwise be attained. Programs must apply to become CDEs; awards totaling up to 3.5 billion are announced annually. The stimulated investments lead to job and material improvement in the residents of struggling communities. Many CDEs serve as intermediaries for providing loans and investments in low income areas, which lead to increased economic activity.

To qualify as a CDE, the program must be located in a distressed community which displays at least one of the following characteristics:

• The poverty level is above 20%.
• The median family income less than 80% of the average family.
• The community is composed of a specified targeted population.
• The population is less than 2000 people.
• It is a rural county with high migration.