New Markets Tax Credit Regulations Modified to Encourage Investments in Non-Real Estate Businesses

The Internal Revenue Service (IRS) recently published final regulations for the New Markets Tax Credit (NMTC) rule to encourage investments in non-real estate businesses. Historically, non-real estate projects have been overlooked by NMTC investors for their tendency to be shorter term loans. These loans, often times for equipment or working capital, traditionally have a term less than seven years. However, NMTC regulations indicate that NMTC investments must remain invested for at least 7 years in qualified low-income businesses. If a loan is repaid sooner, the funds must be reinvested into another qualified low income businesses within 30 days in order to stay in compliance with the program. The burden of identifying another qualified low income business in a short time period has resulted in many investors shying away from non-real estate businesses for NMTC purposes.

However, the new rule allows CDEs flexibility in meeting the reinvestment stipulation:

• CDEs are now able to invest returns of capital into an unrelated CDFI, as long as the CDFI is also a certified CDE.
• Further, the final rule grants the Secretary of the Treasury authority to designate other entities, in addition to CDFIs, as qualified to receive returns of capital.

The objective of these updated regulations is to further the New Markets Tax Credit program goals of job creation and economic revitalization in low-income communities. For more information on the new rule, visit the CDFI Fund’s website or view the final regulations directly.

Will your CDE consider investing in non-real estate projects and businesses?