New Markets Tax Credit

New Markets Tax Credit

by Andrew W. Singer *

The Internal Revenue Code contains a number of tax incentives to taxpayers making investments and loans in low-income communities. IRC Section 45D adds to these incentives by providing a tax credit for qualified equity investments made to acquire stock in a selected community development entity ("CDE"). [The credit is part of the general business credit. IRC Section 38(b)(13). The provision is effective for qualified investments made after Dec 31, 2000.]

Pursuant to IRC Section 45D, a taxpayer who holds a qualified equity investment (an investment in a qualified CDE) is entitled to 5-percent credit for the year in which the equity interest is purchased from the CDE and the first two anniversary dates thereafter, and a 6-percent credit for the next four anniversary dates. [The credit is available to the original purchaser and to any subsequent holder. IRC Section 45D(b)(4). The basis of any qualified equity investment is reduced by the amount of any crdit allowed under IRC Section 45D. The reduction does not apply for purposes of IRC §§ 1202, 1400B, and 1400F. IRC Section 45D(h). An equity investment is any stock (other than nonqualified preferred stock, as defined in IRC Section 351(g)(2). in a corporation or any capital interest in a partnership. IRC Section 45D(B)(6). Treas. Reg. § 1.45D-1(c)(2). The credit is claimed by filing Form 8874 with the taxpayer's federal income tax return.]

The credit is applied to the amount paid to the qualified CDE for the investment at its original issue.

A qualified equity investment is any equity investment in a qualified CDE if:

  1. the investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash,
  2. substantially all of the cash is used by the CDE to make qualified low-income community investments, and
  3. the investment is designated for purposes of IRC Section 45D. [IRC Section 45D(b)(1). Treas. Reg. § 1.45D-1(c)(1).]


There is a national limitation on the amount of qualifying equity investment for each calendar year, namely: $1 billion for 2001, $1.5 billion for 2002 and 2003, $2 billion for 2004 and 2005, and $3.5 billion for 2006, 2007, $5 billion for 2008 and 2009, and $3.5 billion for 2010, 2011, 2012 and 2013. [IRC Section 45D(f)(1).] The limitation is allocated by the Secretary of the Treasury among qualified community development entities selected by the Secretary. [IRC Section 45D(f)(2). A qualified community development entity is eligible for an allocation under IRC Section 45D(f)(1) of the increased limitation applicable to the Gulf Opportunity Zone, described in Treas. Reg. § 1.45D-1(d)(10)(ii), only if a significant mission of the entity is the recovery and redevelopment of the Gulf Opportunity Zone. IRC Section 1400N(m)(1).] In making allocations, the Secretary must give priority to any entity with a record of having successfully provided capital or technical assistance to disadvantaged businesses or communities, or that intends to use substantially all the cash it raises to make qualified low-income community investments in one or more businesses in which persons unrelated to the entity hold the majority equity interest. [A party is related within the meaning of IRC Section 267(b) or IRC Section 707(b)(1).] If the limitation for any year exceeds the aggregate amount allocated by the Secretary, the limitation for the succeeding calendar year is increased by the amount of the excess. [IRC Section 45D(f)(3). No amount can be carried to a calendar year after 2018. IRC Section 45D(f)(3) is applied separately with respect to the increase in the credit limitation. IRC Section 1400N(m)(3).]

A CDE must provide notice to any taxpayer who acquires a qualified equity investment in the CDE at its original issue that the equity investment is a qualified equity investment entitling the taxpayer to claim the new markets credit. [Treas. Reg. § 1.45D-1(g)(2)(i)(A). The notice must be given no later than 60 days after the date the taxpayer makes the investment in the CDE and must contain the amount paid to the CDE for the qualified equity investment at its original issue and the taxpayer identification number of the CDE.] In addition, if at any time during the seven-year period beginning on the date of original issue of a qualified equity investment in a CDE, there is a recapture event, the CDE must provide notice to each holder, including prior holders, that a recapture event has occurred. [Treas. Reg. § 1.45D-1(g)(2)(i)(B).The notice must be provided no later than 60 days after the date the CDE becomes aware of the recapture event.]

The availability of federal tax benefits does not limit the availability of the new markets credit. [Treas. Reg. § 1.45D-1(g)(3)(i).] This rule does not apply to the low-income housing credit under IRC Section 42. [Treas. Reg. § 1.45D-1(g)(3)(ii).] The bankruptcy of a CDE does not preclude a taxpayer from continuing to claim the new market credits on the remaining credit allowance dates. [Treas. Reg. § 1.45D-1(g)(4).]

* Andrew W. Singer is the author of Taxation of Securities Transactions,


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