New Markets Tax Credits

Association of Construction and Development
April 19, 2013 — 1,561 views  

A program that has been in existence since 2000, the New Markets Tax Credit, is aimed at revitalizing low-income households and communities that are below poverty line. This program offers tax credits to those who invest in certified Community Development Entities (CDEs) that focus on developing low-income communities.

Equity Investments to Revitalize Development

CDEs can be authorized to allocate a certain percentage of tax credits to investors. Typically, they would apply to the Community Development Financial Institutions Fund (CDFIs) for the authorization to raise a defined capital or equity investment from the investors. Once the investors make the investment, they will be eligible to claim tax credits proportionate to their investment. They can claim these credits anytime in a seven-year period of compliance.

Eligibility to Receive Tax Credits

Organizations that aspire to be awarded tax credits under the New Markets Tax Credits program must be certified as a CDE by the CDFI. In order to qualify, these organizations should be either partnerships or domestics that demonstrate a mission to develop low-income communities through investment capital or actions. They should also be accountable to the people in the communities as board members of the CDE.

Fostering Community Development

According to the United States Bureau of Census, the poverty rate in low-income communities that companies wish to develop should be at least 20%. The median income of the families should not exceed 80% of the statewide income. Various projects that can be undertaken include real estate development including construction of better quality homes for the people in the community. Businesses can also choose to support projects in environmental development like reduction of greenhouse gas emissions, planting trees, spreading awareness about environmentalism, producing goods that are eco-friendly, and more. Some projects are ineligible to be supported under this program like setting up golf courses, alcohol sales chains, residential rentals, and farms.

Earning Returns through the Program

An investor can earn good returns through this program in two ways. He could completely fund equity for the Qualified Equity Investment (QEI) that would bring him a regular interest income through the CDE, and tax credits. Alternatively, he could enter a partnership to enable a leveraged transaction to combine his cash investments with the total investment fund. This will provide tax credits that are equivalent of the bulk investment amount.

Benefits of this Program

Projects that focus on developing low-income communities would benefit largely from this program since investors would seek to gain tax credits in return for their investments. Transaction costs would be quite low, and interest rates or borrowing costs would be highly reduced. This program helps many foundations to help underprivileged people find jobs, and improve their households, while also smartly using the investment without having to pay much on the interest.

Advantages for Investors

With the venture into community capitalism, investors are exploring the untapped markets of America by fostering the development of distressed communities. Their investment does not only earn them tax credits that can be claimed over a period of years, but they can also trade these tax credits to create more funds to invest. Like the stock market, this new market of community capitalism, that provides government officials and investors to contribute towards the development of the nation, ensures that their money is used for the right causes.

Association of Construction and Development