New Markets Tax Credit

New Markets Tax Credit

August 01, 2005 | By Keith Martin in Washington, DC

New markets tax credit applications for calendar year 2006 must be posted by August 22.

New markets tax credits are an incentive for institutional investors to invest equity in entities that, in turn, lend the money to finance projects in low-income communities. The companies that do the lending are called “CDEs,” or community development entities. Congress created the program in 2000. It had in mind storefront operations that lend small amounts of money to help get small businesses get off the ground in low-income areas. CDEs apply to the US Treasury for permission to offer equity investors in them tax credits as an inducement to invest. This helps the CDEs raise money. Each equity investor gets a tax credit for 39% of the equity he or she invests. The tax credits must be taken over seven years.

Each August and September, the Treasury opens the window to new applications from CDEs for allocations of tax credits for the coming year. Last year the Treasury allocated $2 billion in tax credits among 41 CDEs. It has $3.5 billion to allocate for 2006.

US banks and tax credit syndicators have been looking at the program as a way to offer more product to their customers.

Applications for tax credit allocations must be postmarked by September 21 and received by September 30. However, entities that are not yet certified as CDEs must apply separately for CDE status in late August. Such applications must be postmarked by August 22.

There will be one more round of tax credits allocated in the fall next year for 2007. At that time, the Treasury will have another $3.5 billion in tax credits to allocate.

Keith Martin