Written by the Keiter Tax Department
The New Markets Tax Credit (“NMTC”) expired on December 31, 2013, and has yet to be renewed. Two bills seeking to make the credit permanent are in Committee currently, and likely will not be passed until the next Congressional session. However, if one of the bills is passed, the legislation may be enacted retroactively to include investments made in 2014.
The NMTC was established as part of a government program to incentivize investment in Community Development Entities (“CDEs”), domestic corporations or partnerships that are intermediaries for the provision of loans or equity investments in Low-Income Communities. The role of CDEs is to invest in small businesses in low-income areas, monitor those investments, and assist the business in its efforts to grow and prosper.
While making a positive difference in the community, the investor is also able to claim a tax credit generated as a result of his or her original investment in the CDE. Through the program, a taxpayer is eligible for a total credit of 39% of his or her investment over a period of seven years. The credit is equal to 5% of the total initial investment for each of the first three years, then increases to 6% for the next four years for a total of 39%. The credit is claimed on Form 8874 which must be attached to the taxpayer’s filed income tax return. Taxpayers should note that if the investment is recalled at any point during the seven year period the taxpayer is subject to a recapture provision.