New Markets Credit

You can claim a tax credit for a qualified equity investment in a qualified community development entity (CDE) made after April 19, 2001. This is called the new markets credit.

You claim the credit over a period of 7 years until 2007. To find the amount of your credit each year, multiply the amount you paid the qualified CDE for your qualified equity investment by a percentage. The percentage is:

• 5% for the year the investment is made and each of the next 2 years, and
• 6% for each of the next 4 years.

Thus, the credit can be up to 39% of your investment over a 7-year period.

To claim the credit for a year, you must hold the qualified equity investment on the credit allowance date for that year. The credit allowance date is the date you make the initial investment and each of the next 6 anniversary dates.

Qualified CDEs apply to the U.S. Department of Treasury's Community Development Financial Institutions (CDFI) Fund for an allocation of the new markets credit. A CDE will seek taxpayers to make qualifying equity investments in the CDE. The CDE will be required to use substantially all of the qualified equity investments to make qualified low-income community investments in qualified active low-income community businesses (QALICBs), discussed later. After the CDE is awarded a tax credit allocation, the CDE is authorized to allocate the tax credits to private equity investors in the CDE.

A qualified CDE is any U.S. corporation or partnership that meets the following requirements.

• Its primary mission is serving, or providing investment capital for, low-income communities or persons.
• It maintains accountability to residents of low-income communities through their representation on any governing or advisory boards of the entity.
• It is certified by the CDFI Fund of the Department of Treasury.

Qualified CDEs also include specialized small business investment companies and community development financial institutions. For more information, see section 45D(c)(2) of the Internal Revenue Code.

Generally, this is the cost of any stock in a corporation or any capital interest in a partnership if the following requirements are met.

• The corporation or partnership is a qualified CDE (defined earlier).
• You acquire the investment on the original issue date for cash. The cash may be from borrowed funds, including a nonrecourse loan.
• At least 85% of the cash is used to make qualified low-income community investments (defined later), or at least 85% of the entity's total gross assets are in qualified low-income community investments. The 85% requirement is reduced to 75% for the seventh year of the 7-year credit period.
• The qualified CDE designates the investment as a qualified equity investment on its books and records for purposes of the new markets credit.

Generally, this means one of the following.

• Any capital or equity investment in, or loan to, any QALICB (defined below).
• The purchase from another qualified CDE of any loan made by that entity provided that it was a qualified low-income community investment at the time it made or sold the loan.
• Providing financial advice about organizing or operating a business to QALICBs and residents of low-income communities.
• Any equity investment in, or loan to, any qualified CDE used to make other qualified low-income community investments.

This is any corporation (including a nonprofit corporation), partnership, or sole proprietorship, if all the following requirements are met for the tax year.

1. At least 50% of its total gross income is from the active conduct of a qualified business (defined next) within a low-income community.
2. At least 40% of the use of its tangible property (whether owned or leased) is within a low-income community.
3. At least 40% of its employees' services are performed in a low-income community.
4. Less than 5% of the average of the total unadjusted bases of the property of the entity is from:
   1. Nonqualified financial property (generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, and annuities), or
   2. Collectibles not held primarily for sale to customers in the ordinary course of its business.

Also, a sole proprietorship that would qualify if it were separately incorporated is treated as a qualified active low-income community business.

This is generally any trade or business except one that consists primarily of developing or holding intangibles for sale or license. However, the rental to others of real property located in a low-income community is a qualified business only if the property is not residential rental property and there are substantial improvements located on the property. Also, a qualified business does not include any business listed earlier in item (5) or item (6) under Nonqualified employees in the Empowerment Zone Employment Credit section.

A low-income community generally means any population census tract if any of the following apply.

• The poverty rate is at least 20%.
• If the tract is not located within a metropolitan area, the median family income is not more than 80% of statewide median family income.
• If the tract is located within a metropolitan area, the median family income is not more than 80% of the greater of the statewide median family income or the metropolitan area median family income.

Generally, a qualified CDE can designate an equity investment as a qualified equity investment only if it applied for and received a new markets credit allocation and entered into an allocation agreement with the CDFI Fund before the investment was made.

An equity investment in an entity is eligible to be designated as a qualified equity investment if made prior to an allocation agreement only if one of the following applies.

• The equity investment was made after April 19, 2001, and the designation of the equity investment as a qualified equity investment is made for a credit allocation received under an allocation application timely submitted to the CDFI Fund no later than August 29, 2002. For details, see Notice 2003-9 on page 369 of Internal Revenue Bulletin 2003-5 at www.irs.gov/pub/irs-irbs/irb03-05.pdf.
• The equity investment was made after July 17, 2003, and the designation of the equity investment as a qualified equity investment is made for a credit allocation received under an allocation application submitted to the CDFI Fund under a Notice of Allocation Availability (NOAA) published by the CDFI Fund in the Federal Register on or before the date the equity investment was made. If the entity in which the equity investment is made does not receive an allocation under that NOAA, the equity investment is not eligible to be designated as a qualified equity investment under future NOAAs. For details, see Notice 2003-56, on page 396 of Internal Revenue Bulletin 2003-34 at www.irs.gov/pub/irs-irbs/irb03-34.pdf.

NMCs are allocated annually by the CDFI Fund to CDEs under a competitive application process. The maximum amount of qualified equity investments designated by the qualified CDE cannot exceed the amount of the allocation received from the CDFI Fund. The U.S. Department of Treasury awarded to 66 entities on March 14, 2003, the first $2.5 billion in tax credit allocations under the NMC program. These entities are listed in Table 4, below. For information about future NMC allocations, see the CDFI fund website at www.cdfifund.gov/programs/nmtc.

Name of Awardee	City and State	Credit Allocation
Alaska Growth Capital BIDCO, Inc.	Anchorage, AK	$5,000,000
Advantage Capital Community Development Fund, L.L.	New Orleans, LA	$110,000,000
ASB Community Development Corp	Portsmouth, OH	$2,000,000
Bethel New Life, Inc.	Chicago, IL	$4,000,000
Border Communities Capital Company, LLC	Solana Beach, CA	$50,000,000
Cahaba Community Development, LLC	Birmingham, AL	$40,000,000
Campus Partners for Community Urban Redevelopment	Columbus, OH	$35,000,000
CBSI Development Fund, Inc.	New Albany, IN	$3,000,000
Central Ohio Loan Services, Inc.	Waverly, OH	$6,000,000
CFBanc Corporation	Washington, DC	$73,000,000
Citizens Business Development Company, LLC	Jackson, KY	$3,000,000
Citizens Tri-County Development Corporation	Dunlap, TN	$1,000,000
Clearinghouse CDFI	Lake Forest, CA	$56,000,000
Cleveland New Markets Investment Fund LLC	Cleveland, OH	$15,000,000
CNC Development Foundation, Inc.	Paintsville, KY	$2,000,000
Coastal Enterprises, Inc.	Wiscasset, ME	$65,000,000
Community Development Funding, LLC	Clarksville, MD	$25,000,000
Community Development New Markets I LLC	Cleveland, OH	$150,000,000
Community Economic Redevelopment Corporation	Chicago, IL	$6,000,000
Community Loan Fund of New Jersey, Inc.	Trenton, NJ	$15,000,000
Community Trust Community Development Corporation	Pikeville, KY	$7,000,000
Community Ventures Corporation, Inc.	Lexington, KY	$12,000,000
Delaware Community Investment Corporation (DCIC)	Wilmington, DE	$15,000,000
Eclypse Development Partners I LLC	Atlanta, GA	$22,000,000
Empowerment Reinvestment Fund, LLC	New York City, NY	$10,000,000
Enterprise Corporation of the Delta	Jackson, MS	$15,000,000
ESIC New Markets Partners Limited Partnership	Columbia, MD	$90,000,000
First State Development Corp.	Union City, TN	$7,000,000
Greater Jamaica Local Development Company, Inc.	Jamaica, NY	$21,000,000
GS New Markets Fund	New York, NY	$75,000,000
HEDC New Markets, Inc.	New York, NY	$30,000,000
Illinois Facilities Fund, The	Chicago, IL	$10,000,000
Impact Community Capital CDE, LLC	San Francisco, CA	$40,000,000
Impact Seven, Inc.	Almena, WI	$21,000,000
KHC New Markets CDE, LLC Series A	Carlsbad, CA	$134,000,000
LA Charter School New Markets CDE LLC	Santa Monica, CA	$36,000,000
Lenders for Community Development	San Jose, CA	$25,000,000
Liberty Bank and Trust Company	New Orleans, LA	$50,000,000
Local Initiatives Support Corporation (LISC)	New York, NY	$65,000,000
MetaFund Corporation	Oklahoma City, OK	$54,000,000
MHIC, LLC	Boston, MA	$25,000,000
Mid-City Community CDE, LLC	Silver Spring, MD	$36,000,000
National Community Capital	Philadelphia, PA	$8,000,000
National New Markets Tax Credit Fund, Inc.	Minneapolis, MN	$162,500,000
National Trust Community Investment Corporation	Washington, DC	$127,000,000
Neighborhood Bancorp	National City, CA	$5,000,000
New Markets Community Capital, LLC	Los Angeles, CA	$30,000,000
Norfolk Redevelopment & Housing Authority	Norfolk, VA	$15,000,000
North Coast Community Development Corporation	Lorain, OH	$9,000,000
Northside Community Development Fund	Pittsburgh, PA	$500,000
Nuestra Development Fund	Roxbury, MA	$1,000,000
Ohio Community Development Finance Fund	Columbus, OH	$15,000,000
Paramount Community Development Fund, LLC	Granville, OH	$75,000,000
Phoenix Community Development and Investment Corporation	Phoenix, AZ	$170,000,000
Prince George's Community Capital Corporation	Largo, MD	$10,000,000
REI New Markets Investment, LLC	Durant, OK	$80,000,000
Rural Community Assistance Corporation	West Sacramento, CA	$8,000,000
Self-Help Ventures Fund	Durham, NC	$75,000,000
Southeast Indiana Community Development	Dillsboro, IN	$3,000,000
Southern Appalachian Fund	Oak Ridge, TN	$2,000,000
The Association For Theater-Based Community Development	Columbus, OH	$6,000,000
Urban Development Fund, LLC	Chicago, IL	$15,000,000
Wachovia Community Development Enterprises, LLC	Charlotte, NC	$150,000,000
West Virginia Community Development Loan Fund, Inc.	Barboursville, WV	$4,000,000
WNC National Community Development Advisors, LLC	Costa Mesa, CA	$50,000,000
123 New Market Investors LLC	Washington, DC	$13,000,000

The credit is recaptured if, within the 7-year credit period, the CDE is no longer qualified, substantially all of the proceeds of the investment are no longer used for a qualifying purpose, or the investment is redeemed.

Use Form 8874 to claim this credit.

For more information about the new markets credit, see section 45D of the Internal Revenue Code and the regulations under that section.