Enacted as part of the Community Renewal Tax Relief Act of 2000, the New Markets Tax Credit (NMTC) Program promotes economic development in rural and urban low-in-come communities.
Federal Tax Initiative
The program is a federal tax initiative designed to increase the amount of investment capital available to business and economic development programs in low-income communities. The NMTC is administered by the Community Development Financial Institutions (CDFI) Fund under the U.S. Department of the Treasury.
Community Development Financial Institutions Fund
The CDFI Fund was created for the sole purpose of expanding the availability of credit, investment capital, and financial services in distressed urban and rural communities. Each year, tax credits are allocated for distribution to certain qualifying entities through the CDFI Fund. These qualifying community groups are known as Community Development Entities, or CDEs.
Community Development Entities
A Community Development Entity must invest substantially all (85%) of the equity investments received from investors in qualified low-income communities.
Qualified Low-Income Communities
Qualified low-income communities include particular population census tracts, defined as those with a poverty rate of at least 20%, or with median family income of not more than 80% of statewide median family income.
Target Area Investments
Investments may also be made in target areas, those within a census tract not meeting the poverty or median income guidelines, but which have demonstrated an inadequate access to investment capital in the area.
Investments by community banks in CDEs are then reinvested by the CDE in low-income communities, generally in the form of business loans, lines of credit, or direct equity investments in active low-income community businesses.
The NMTC federal tax credit is worth 39% of the cost of the initial investment and claimed over a seven-year period. In each of the first three years, the bank receives a credit equal to 5% of the total amount paid for the stock or capital interest in the CDE. For the remaining four years, the value of the credit is 6% annually.
During the seven-year tax period, if the equity investment is redeemed or if the CDE ceases to be a qualified CDE, then the community bank investment is subject to recapture of the tax credit and interest.