Businesses in economically distressed communities can face challenges when seeking capital for growth and investment. Funding may be needed for expansion, new equipment, facilities, or other business improvements.

Fortunately, the New Markets Tax Credit for businesses can help encourage private investment in underserved communities. The program provides federal income tax credits to qualifying investors who support eligible projects. Previously, the New Markets Tax Credit was scheduled to expire on December 31, 2025. However, the One Big Beautiful Bill Act made the program permanent.

As a result, qualifying businesses may have additional opportunities to attract financing for future projects. Let’s explore how this tax incentive works and whether your business could benefit. The Ray Group in Temecula, California, helps businesses understand tax strategies and opportunities that may support their financial goals.

New Markets Tax Credit for Business: Potential Tax and Financing Benefits

The NMTC generally applies to individuals and businesses making qualified equity investments in community development entities, known as CDEs. A CDE is typically a domestic corporation or partnership focused on serving low-income communities. Additionally, these organizations may provide investment capital to businesses and projects within qualifying areas.

To participate, a CDE must receive certification from the U.S. Department of the Treasury’s Community Development Financial Institutions Fund. Once certified, the CDE raises money from investors to support qualifying activities in low-income communities. These activities can include loans, equity investments, and other approved financing opportunities.

However, the potential benefits depend on your business’s role in the transaction. Businesses investing in a CDE may qualify to claim the federal tax credit. Alternatively, businesses receiving CDE financing may benefit from greater access to capital. They may also receive financing terms that might otherwise be unavailable through traditional funding sources.

Therefore, the New Markets Tax Credit for businesses may offer valuable financing opportunities for qualifying small business owners. The Ray Group in Temecula, California, can help business owners evaluate tax opportunities that support their financial goals.

Credit Amount and Filing Requirements for Investors

The NMTC equals 39% of an investor’s qualified equity investment in a community development entity, or CDE. However, investors do not claim the entire credit at once. Instead, the credit is spread across seven years.

Investors may claim 5% of their qualified investment during each of the first three years. They may then claim 6% annually during the next four years. For example, a qualifying $1 million investment could generate $390,000 in federal tax credits over seven years. However, applicable tax limitations may affect the final amount.

To qualify, an investor must make a cash investment that the CDE designates as a qualified equity investment. Additionally, the CDE must use substantially all invested funds for qualified low-income community investments, known as QLICIs.

Generally, the CDE must invest at least 85% of its aggregate gross assets in QLICIs. However, that requirement decreases to 75% during the seventh year. Investors calculate the credit using Form 8874, New Markets Credit. They then report it as part of the general business credit on Form 3800.

Importantly, claiming the credit reduces the investor’s tax basis in the investment. Therefore, this reduction could affect the tax consequences of a future sale. Previously claimed credits may also be recaptured with interest under certain circumstances. For example, recapture may occur if the CDE fails to meet program requirements.

Additionally, recapture may apply if the CDE redeems the investment during the seven-year credit period. Understanding the New Markets Tax Credit for businesses can help investors evaluate potential tax benefits and long-term requirements.

How Qualifying Businesses Can Benefit From NMTC Financing

The NMTC encourages investment in CDEs, which can expand financing opportunities for businesses in low-income communities. Additionally, qualifying nonprofit organizations and community projects may receive financing supported through the program.

Eligible projects may include real estate developments, manufacturers, retailers, healthcare providers, childcare centers, schools, hotels, and community centers. For example, consider a grocery store in a qualifying community that needs financing to renovate its building.

A CDE could use investor capital to provide the grocery store with a loan or equity financing. In this situation, qualified investors could receive the federal tax credit. Meanwhile, the grocery store gains access to needed financing.

This financing may provide opportunities that could otherwise be difficult to obtain through conventional lending sources. Therefore, the New Markets Tax Credit for businesses can help connect qualifying businesses with capital for important projects.

However, operating in a low-income community does not automatically make a business eligible for NMTC-supported financing. The CDE must evaluate the business, its location, and the proposed use of the financing. Ultimately, these factors must satisfy the program’s requirements before the business can receive NMTC-supported financing.

Exploring NMTC Opportunities

The permanent New Markets Tax Credit for businesses may offer a valuable tax break for qualified investors. As such, it can provide an important source of financing for qualifying community development projects as well as businesses.

However, the rules are complex. But The Ray Group can help you estimate the potential financial or tax benefits and address applicable compliance requirements. Get in touch with our expert tax team today.

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