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The new markets tax credit (NMTC) program, established in 2000, is administered by the U.S. Department of the Treasury’s Community Development Financial Institution (CDFI) Fund. The program provides individual and corporate taxpayers with a credit against federal income taxes for making qualified investments in community development entities (CDEs).
In order to offer tax credits to its investors, an organization must be certified as a CDE by the CDFI Fund and must be selected to receive an allocation under a competitive allocation round. CDEs that receive allocations can then obtain qualified equity investments from investors who are looking to acquire stock, capital interest in, or make a loan to the CDE in exchange for the tax credits. A CDE must use substantially all of the qualified equity investment proceeds to make investments in low-income communities as defined by the IRS. In addition, a CDE must issue at least 60 percent of its tax credit allocation within the first five years of receiving the award.
When investors provide qualified equity investments to CDEs, they are able to claim a tax credit equal to 39 percent of the original investment. The credit is claimed over a seven year period. The credit is 5 percent of the initial investment amount in the first to third year and 6 percent of the initial investment amount in the fourth to seventh year.
Investors may not redeem their investment with the CDE prior to the end of the seven-year period. Early redemption triggers a “recapture event” by the IRS, necessitating the investor to repay (with interest and penalties) any benefits received from the credits. Recapture events are also triggered if the CDE fails to invest substantially all of the tax credit proceeds in low-income communities, or if it has its CDE designation revoked by the CDFI Fund.
The CDFI Fund is authorized to allocate $16 billion in tax credit authority through 2007, which includes $1 billion to be allocated to CDEs with a significant mission of redevelopment in the Hurricane Katrina Gulf Opportunity Zone. The fund has administered four allocation rounds to date and has made 233 awards totaling $12.1 billion in tax credit authority. The CDFI Fund will allocate the remaining $3.9 billion of allocation authority in 2007.
The first round of allocations was awarded in March 2003 and, since the program is still relatively new, there is not enough data to measure the impact of completed projects. The CDFI Fund does collect transaction- level data from its allocatees annually. The fund recently released data pertaining to allocatees’ fiscal year 2004 reports. According to the CDFI Fund, through the end of the 2004 fiscal year:
Since the 2004 fiscal year, several additional projects have been financed using NMTCs in all three states in the Third District, including two projects in Trenton, NJ, that are described in an accompanying article.
Information about the NMTC program may be found at www.cdfifund.gov.