New Market Tax Credits

The Community Renewal Tax Relief Act of 2000 was the legislation that gave us New Market Tax Credits. New Market Tax Credits (NMTC) are one of the most exciting examples of Government tax credits used for social good.

The Community Renewal Tax Relief Act of 2000 introduced the business community to an exciting new Tax Credit program call the New Market Tax Credits. The New Market Tax Credits, known as NMTCs, would serve as a spur to potential investors to invest funds in targeted ventures designed to cause a renewal of community development in the cities of America. The program was designed to pump 15 billion dollars into such projects.

The program begins with lending institutions that qualify as Community Development Entities (CDEs). These CDEs then place investments in what are called Qualified Equity Investments (QEIs). The whole idea of this Government qualifying is to direct the investments at targeted areas. The qualifications vary from program to program, but the general idea is that they are targeted as community renewal or improvement of low income areas.

Your interest in this as a tax payer comes from the new Market Tax Credits. First, you make an investment with a Community Development Entity. They must use your investment for a QEI, of course, and your investment is your investment. It will prosper or fail to meet goals as will any investment. The catch is that you can claim a tax credit against your income for Federal Tax purposes of what amounts to 39% of your investment. 

The credit is spread over a period of 7 years. You take 5% of the investment as a credit in each of the first 3 years. Over the next 4 years, you can up that amount to 6%. At the end of the seven year period you will have claimed a credit equal to 39%. If you invested $100,000, for example, you would be able to claim a credit of $5000 the first 3 years and a credit of $6000 in each of the next 4 years.

Since a tax credit is a direct reduction of taxes owed, this credit effectively means that you have purchased $100,000 of some investment for only $61,000 when the 7 year period is expired. Even if the investment breaks even, you still have profited on it. So, it is easy to see how this spurs investment in CDEs. It is almost too good to be true, and the only thing limiting the program is the lack of Qualified Equity Investments to be made.