Proposed Regulations to Encourage New Markets Tax Credits for Non-Real Estate Business


Investment in non-real estate businesses is currently allowed; however it is difficult and cumbersome. The proposed regulations would help address these issues.

On June 3, 2011 the Department of the Treasury issued proposed regulations modifying the new markets tax credit program. The goal of the proposed regulations is to facilitate and encourage investments in non-real estate businesses in low-income communities.

The NMTC Program
The new markets tax credit (NMTC) program encourages private investment in low-income communities. The program provides a 39% tax credit for qualified equity investments made into community development entities (CDE) that then invest the equity into qualified low-income community businesses (QALICB) in the form of loans, equity or financial counseling. CDEs are required to maintain substantially all of this investment in qualified low-income community investments (QLICI) continuously for seven years in order to avoid recapture of the entire credit. Pre-payments to a CDE of invested equity or principle during the seven-year period with respect to a QLICI must be reinvested by the CDE into another QLICI no later than 12 months from the date of receipt to be treated as continuously invested.

Proposed Changes
The investment/reinvestment requirements make it difficult for CDEs to provide working capital and equipment loans to non-real estate businesses because these loans are ordinarily amortizing loans with a term of five years or less. Therefore, the proposed regulations would allow a CDE that makes a QLICI involving a non-real estate business to invest certain returns of equity or principle from those investments in unrelated certified community development financial institutions that are CDEs under section 45D(c)(2)(B) (certified CDFIs) at various points during the seven-year credit period.

The CDE’s reinvestment of returned capital in certified CDFIs would be considered to meet the reinvestment requirements of the new markets tax credit program. The reinvestment period in these circumstances, however, is limited to 30 days. The proposed regulations would allow an increasing aggregate amount to be invested in certified CDFIs and treated as a "continuous investment" in a QLICI in the latter years of the seven-year credit period.

A non-real estate QALICB, as defined under the regulations, is one whose predominant business activities do not include the development, management or leasing of real estate. Predominant business activity means more than 50% of the business’ gross income.

Under the proposed regulations, the aggregate amount of non-real estate qualified equity investment that may be reinvested into a certified CDFI is:

• 15% in year 2 of the seven-year credit period;
• 30% in year 3 of the seven-year credit period;
• 50% in year 4 of the seven-year credit period;
• 85% in years 5 and 6 of the seven-year credit period;
• For the 7th year of the seven-year credit period, amounts received by the CDE in payment of or for capital, equity or principal are not required to be reinvested into a QALICB.

Next Steps
The IRS and the Department of Treasury are encouraging taxpayers to submit comments regarding this proposed regulation. The submission deadline is September 8, 2011. A public hearing also has been scheduled for September 29, 2011. If you have comments you wish to include with those of Cohen & Company/Ariel Ventures, please contact Dave Sobochan at dsobochan@cohencpa.com or Tony Bakale at tbakale@cohencpa.com.

Cohen & Company provides NMTC services to QALICBs, CDEs and leverage lenders in conjunction with Ariel Ventures, a business consulting firm focused on real estate and economic development projects. Learn more at www.cohencpa.com/nmtc

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.