Businesses located in economically distressed communities can face significant challenges when trying to secure funding for expansion, new equipment, real estate improvements, or other investments.
The New Markets Tax Credit (NMTC) was created to encourage private investment in these underserved areas. The program provides federal income tax credits to eligible investors while helping qualifying businesses and community projects gain access to capital.
The NMTC was previously scheduled to expire at the end of 2025. However, the One Big Beautiful Bill Act made the credit permanent, giving investors and businesses greater certainty about the program going forward.
So, how does the New Markets Tax Credit work, and could your business benefit from it?
How the New Markets Tax Credit Works
The NMTC is generally available to individuals and businesses that make qualified equity investments in Community Development Entities (CDEs).
A CDE is generally a domestic corporation or partnership whose primary purpose is to serve low-income communities or provide investment capital to businesses and projects located in those communities. To participate in the NMTC program, a CDE must be certified by the U.S. Department of the Treasury’s Community Development Financial Institutions Fund.
Once certified, a CDE can raise money from investors and use that capital for qualifying loans, equity investments, and other approved activities in eligible low-income communities.
The potential benefit depends on your role.
If your business invests in a CDE, you may qualify for the federal tax credit.
If your business receives financing from a CDE, you generally won’t receive the tax credit directly. Instead, your business may benefit from increased access to capital or financing arrangements that could be difficult to obtain through traditional lenders.
For many small businesses, this financing opportunity may be the most valuable part of the NMTC program.
How Much Is the New Markets Tax Credit Worth?
For qualifying investors, the NMTC equals 39% of a qualified equity investment in a CDE.
The credit is spread over seven years:
- 5% of the investment in each of the first three years.
- 6% of the investment in each of the following four years.
For example, a qualifying $1 million investment could potentially generate $390,000 in federal tax credits over seven years, subject to applicable requirements and limitations.
This phased approach allows investors to receive tax benefits over the full seven-year credit period rather than all at once.
Requirements for Claiming the Credit
To claim the NMTC, an investor generally must make a cash investment that the CDE designates as a qualified equity investment.
The CDE must then use substantially all of the investment proceeds for Qualified Low-Income Community Investments (QLICIs).
Generally, a CDE meets this requirement when at least 85% of its aggregate gross assets are invested in QLICIs. The threshold is reduced to 75% during the seventh year of the investment period.
Investors claim the credit using Form 8874, New Markets Credit, and report it as part of the general business credit on Form 3800.
Because the program has detailed qualification and compliance rules, investors should carefully evaluate the structure of an NMTC investment before proceeding.
Important Tax Considerations for Investors
The NMTC can provide significant tax benefits, but investors should also understand the potential tax consequences associated with the investment.
Claiming the credit reduces the investor’s tax basis in the investment. That reduced basis can affect the tax consequences if the investment is later sold.
There is also a potential recapture risk.
Previously claimed credits may be subject to recapture, along with interest, if the CDE fails to satisfy certain program requirements or redeems the investment before the seven-year credit period has been completed.
Because of these rules, investors should consider both the potential tax savings and the long-term compliance requirements before making a qualified equity investment.
How the NMTC Can Help Qualifying Businesses
The NMTC can also play an important role in helping businesses and nonprofit organizations located in low-income communities obtain financing.
By encouraging private investment in CDEs, the program can increase the availability of capital for a variety of projects and businesses.
Potential examples include:
- Real estate development projects
- Manufacturing businesses
- Retail operations
- Health care providers
- Child care centers and schools
- Hotels
- Community centers
The financing may be used for projects such as construction, renovation, expansion, equipment purchases, or other qualifying business activities.
Example: Using NMTC Financing for a Business Expansion
Consider a grocery store located in a qualifying low-income community.
The owner wants to renovate the building but has difficulty obtaining enough conventional financing to complete the project.
A CDE could use capital raised through the NMTC program to provide the grocery store with a qualifying loan or equity financing.
In this situation, the investor receives the federal tax credit for making the qualifying investment, while the grocery store gains access to capital that may otherwise have been difficult to secure.
This illustrates an important feature of the NMTC: the business receiving the financing doesn’t necessarily receive the tax credit directly. Instead, the program helps channel private investment into communities and businesses that may have limited access to conventional capital.
Does Operating in a Low-Income Area Automatically Qualify a Business?
No.
Simply operating a business in a low-income community does not automatically make the business or its project eligible for NMTC-supported financing.
The CDE must evaluate the business, the location, the proposed project, and how the financing will be used to determine whether the transaction satisfies the program’s requirements.
Businesses interested in NMTC financing should therefore work with the CDE and qualified tax and financial professionals to determine whether their particular project qualifies.
Explore Your New Markets Tax Credit Opportunities
The permanent New Markets Tax Credit can provide two important benefits: potential federal tax savings for qualifying investors and increased access to financing for eligible businesses and community projects.
However, NMTC transactions involve detailed eligibility, investment, reporting, and compliance requirements. Understanding these rules before entering into a transaction can help you avoid unexpected tax consequences and determine whether the program makes sense for your situation.
If you’re considering an NMTC investment or your business is looking for financing through a Community Development Entity, contact us. We can help you evaluate the potential tax and financing benefits and navigate the applicable compliance requirements.