InvestorCDECorporation orPartnershipQALICBCorporation orPartnershipQualifiedBusinessEquityQualifiedLow IncomeCommunityInvestmentEquity or LoanLow IncomeCommunity1Qualified Equity Investment (QEI)“Qualified equity investment” means any equityinvestment in a qualified community developmententity if—(A) such investment is acquired by the taxpayer at itsoriginal issue (directly or through an underwriter)solely in exchange for cash,(B) substantially all of such cash is used by thequalified community development entity to makequalified low-income community investments, and(C) such investment is designated for purposes ofthis section by the qualified community developmententity.Credit Amount: 39% x QEI, spread over 7 years.Limitation: the amount designated for credit under(C) cannot exceed the amount allocated by theSecretary. The CDE must apply for and receive acredit allocation. Credits used by the investor alsocannot exceed the limits under IRC §38.4Qualified Business“Qualified business” means any trade or business, butwith limitations for rental real property andintangible property. Excluded are: any golf course,country club, massage parlor, hot tub facility, suntanfacility, racetrack or other facility used forgambling, any store the principal business of which isthe sale of alcoholic beverages for consumption offpremises, and farming where the assets are less than$500,000.5Low Income Community“Low-income community” means any population censustract if the poverty rate for such tract is at least20 percent. Where such information is not available,other rules provide when an area is considered alow-income community.2Qualified Community Development Entity (“CDE”)“CDE” means any domestic corporation or partnership if—(A) the primary mission of the entity is serving, or providing investmentcapital for, low-income communities or low-income persons,(B) the entity maintains accountability to residents of low-incomecommunities through their representation on any governing board of theentity or on any advisory board to the entity, and(C) the entity is certified by the Secretary for purposes of this sectionas being a qualified community development entity.Also included is any specialized small business investment company underIRC §1044(c)(3) and a community development financial institution.3Qualified Active Low-Income Community Business (“QALICB”)“QALICB” means any corporation or partnership if—(i) at least 50 percent of gross income is derived from the active conductof a qualified business within a low-income community,(ii) a substantial portion of the use of the tangible property of suchentity (whether owned or leased) is within any low-income community,(iii) a substantial portion of the services performed for such entity byits employees are performed in any low-income community,(iv) less than 5 percent of the average of the aggregate unadjusted basesof the property is attributable to collectibles (as defined in section408(m)(2)) other than collectibles held primarily for sale to customers inthe ordinary course of such business, and(v) less than 5 percent of the average of the aggregate unadjusted basesof the property is attributable to nonqualified financial property (asdefined in section 1397C(e)).LegendOwnership / structural holdingTransfer of stock / cash / assets

New Markets Tax Credit Explained

The New Markets Tax Credit under IRC § 45D channels private capital into low-income communities through a chain of qualified parties. An investor makes a qualified equity investment (QEI) — an equity investment acquired at original issue solely for cash — in a qualified community development entity (CDE). Substantially all of that cash must be used by the CDE to make qualified low-income community investments, and the investment must be designated by the CDE for purposes of the section.

The CDE then deploys the capital as equity or a loan — a qualified low-income community investment — into a qualified active low-income community business (QALICB). A QALICB is a corporation or partnership that derives at least 50 percent of its gross income from the active conduct of a qualified business within a low-income community, uses a substantial portion of its tangible property and employee services there, and holds only minimal collectibles and nonqualified financial property.

The qualified business must be a trade or business (subject to limits on rental real property and intangibles, and excluding golf courses, country clubs, massage or suntan parlors, gambling facilities, off-premises liquor stores, and small farming operations), and it must operate in a low-income community — generally a census tract with a poverty rate of at least 20 percent.

The credit equals 39% of the QEI, claimed over a seven-year period. The amount designated for credit cannot exceed the allocation the CDE receives from the Secretary, and the credit the investor uses cannot exceed the limits under IRC § 38.

Key Takeaways

39% credit over seven years

The New Markets Tax Credit equals 39% of the qualified equity investment, claimed by the investor over a seven-year period, and cannot exceed the credit allocation the CDE receives from the Secretary.

Capital flows through a certified CDE

The investor’s cash QEI must go to a certified community development entity, which must use substantially all of it to make qualified low-income community investments — deployed as equity or a loan into a QALICB.

QALICB tests are location-based

A qualified active low-income community business must earn at least 50% of its gross income from an active business in a low-income community and keep its property and services substantially within that community, with minimal collectibles and nonqualified financial property.

Community and business limits apply

The business must operate in a low-income community (generally a census tract with a poverty rate of at least 20 percent) and cannot be an excluded activity such as a golf course, gambling facility, or off-premises liquor store.

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