Improved Guidance for Nonprofit Organizations Utilizing New Markets Tax Credits to Better Serve Low-Income Communities¹

By Julie Treppa²

EXECUTIVE SUMMARY

New Markets Tax Credits ("NMTCs") issued under Section 45D of the Internal Revenue Code ("Code")³ have been instrumental in supporting private investment in a wide range of businesses and nonprofit organizations located in communities with low-medium incomes and high rates of unemployment. In fact, for every $1 invested by the Federal government, the U.S. Department of Treasury estimates that the New Markets Tax Credit Program (the "NMTC Program") generates over $8 of private investment in low-income and impoverished communities across the United States and its territories.⁴ This paper proposes amendments to the Treasury Regulations ("Regulations") to clarify the types of income that may be used in evaluating whether investments qualify for NMTCs, and what may be properly characterized as a capital investment in a nonprofit.

Nonprofit organizations have been vital to the deployment and use of NMTCs in transactions that have revitalized impoverished communities and assisted those living in poverty. Multiple nonprofit organizations have applied for, and received, an allocation of NMTCs. Others have received cash proceeds from qualified investments made pursuant to the NMTC Program. However, investments in this latter category have generally been limited to organizations involved in the substantial rehabilitation of real estate. While such projects certainly are worthwhile, clarity with respect to how a nonprofit organization can meet the gross income test under Code Section 45D(d)(2) (A)(i) (the "Gross Income Test") in order to be properly characterized as a "qualified active low-income community business" ("QALICB")⁵ would open up NMTC financing to other nonprofits who run operations and programs that are desperately needed in these communities.