Revisiting the new markets tax credit.

• Author: Lovingers, Sarah

The new markets tax credit (NMTC) was enacted under the Community Renewal Tax Relief Act of 2000, RL. 106-554, and was incorporated into the Internal Revenue Code as Sec. 45D. The NMTC aims to encourage capital investment in economically depressed areas by private investors in exchange for federal income tax credits. Treasury has used data collected over the past 10 years to analyze the program's overall effectiveness in stimulating the local economy and promoting job growth. The results have shown that the NMTC has been effective in spurring investment in real estate development, but it has failed to attract a significant amount of investment in other types of businesses.

Earlier this year, the Obama administration introduced the Startup America initiative, a national campaign aimed at increasing U.S. worldwide competitiveness in high-growth, job-creating industries, such as clean energy, medicine, advanced manufacturing, and information technology. As a part of the plan, President Barack Obama proposed to expand the NMTC to encourage private-sector investment in startups and small businesses operating in lower-income communities. To that end, Treasury has proposed revisions to the NMTC regulations, primarily to make the program more attractive to investors in non-real estate businesses in low-income communities. The proposed regulations were published in a notice of proposed rulemaking (REG-10 1826-11) issued in June 2011.

Legal Framework of the NMTC

Sec. 45D(a) provides that taxpayers who hold a qualified equity investment (QEI) can claim an NMTC equal to 39% of the original Investment amount in a qualified community development entity (QCDE). Taxpayers claim the credit over a seven-year period at a rate of 5% of the investment amount for each of the first three years and 6% for each of the remaining four years. Sec. 45D(h) requires taxpayers to reduce their basis in the QEI by the amount of the credit claimed. Taxpayers that redeem their investment during the seven-year period are subject to recapture of the credit plus interest.

A QEI is defined in Sec. 45D(b) as any investment in a QCDE if:

* The investment is acquired at its original issue solely in exchange for cash;

* Substantially all of the cash is used by the QCDE to make qualified low-income community investments (QLICIs); and

* The investment is designated by the QCDE as a QEI on its books and records using any reasonable method.

Sec. 45D(c) defines a QCDE as any domestic...