Nonprofit organizations (NPOs) that serve low-income communities often have difficulty raising funds to pursue their missions. The COVID-19 pandemic made fundraising even more difficult. Many NPOs are still struggling to return to their pre-pandemic financial state. The New Markets Tax Credit (NMTC) program may offer a way for NPOs in low-income communities to obtain funds. Congress has extended the program through 2025, so there is time to explore this option. Read on to learn more about the NMTC program and how it could benefit your organization.
Congress first created the NMTC program in 2000 as a way to encourage investment in low-income, underserved communities in both urban and rural areas. The program provides a tax credit for investments in “qualified community development entities” (CDEs). Those CDEs then give loans, grants or equity investments to “qualified active low-income community businesses” (LICBs). This may include both for-profit and nonprofit entities.
Taxpayers may claim a tax credit for investments in CDEs. Several definitions are important here. A CDE, as defined by the statute, is a corporation or partnership that meets three criteria:
The CDEs use the money invested by taxpayers to make “qualified low-income community investments,” which include capital investments, equity investments and loans to LICBs.
To qualify as a LICB, an organization must meet the following criteria:
LICBs may engage in “any trade or business” except for the rental of real or personal property, which has some limitations set by statute. Almost any kind of NPO, therefore, may qualify for funding from CDEs, as long as they meet the low-income-community requirements.
The statute defines a “low-income community” as a census tract where the poverty rate is 20% or greater, or one of the following applies:
A taxpayer may claim a credit of 39% of the amount of their investment in a CDE over a period of seven years. For the first three years, the taxpayer may claim a credit of 5% each year. They may claim a credit of 6% for the remaining four years.
If a taxpayer makes a $75,000 investment in a CDE, they may claim a total tax credit of $29,250 in the following increments:
For calendar years 2020 through 2025, the total amount of NMTCs may not exceed $5 billion per year. The Treasury allocates this amount among the qualified CDEs.
NPOs that serve low-income communities can seek funding from CDEs.
The statute sets few limits on the types of activities in which LICBs may engage, as long as they benefit low-income communities. Examples of NPO programs that could qualify for NMTC funding may include:
Each CDE has its own criteria and procedures for awarding funding to NPOs and businesses. The first step is to determine whether your project meets the NMTC program’s general criteria. Next, look for CDEs that might be a good fit for your project and your organization’s mission.
You will have to get specific information from the CDE about how it structures its transactions. This will allow you to plan for how your NPO will handle the funding in order to avoid potential tax or liability consequences.
If you have any questions or would like additional information about anything mentioned, please comment below or email us at email@example.com.
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