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Comprehensive Overview of the New Markets Tax Credit (NMTC) Program

This presentation provides a detailed overview of the New Markets Tax Credit (NMTC) program, aimed at promoting investment in low-income communities. It covers the program’s background, structure, and claiming processes, including the application and award processes for Community Development Entities (CDEs). Key aspects like leveraged structures, avoiding credit recapture, and examples of qualified low-income community investments are discussed to illustrate how NMTCs can foster community growth and development.

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Comprehensive Overview of the New Markets Tax Credit (NMTC) Program

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  1. An introduction to the New Markets Tax Credit

  2. Brad Elphick, CPA Novogradac & Company brad.elphick@novoco.com

  3. Outline Outline/Agenda • Background and purpose of NMTC program • The basic NMTC structure • Claiming the credits • Tax credit pool, application process and award process • The leveraged structure • Avoiding credit recapture

  4. Business $ $ $ $ Section 45D ‘00 Credits IRC ? Tax Liability Investor(s) ROI “New Markets Tax Credit” $ $ or Low-Income Community Thriving Community

  5. Program Definition Community Development Entitiesmust use… Substantially All of the proceeds from… Qualified Equity Investmentsto make… Qualified Low-Income Community Investmentsin… Qualified Active Low-Income Community Businesseslocated in… Low-Income Communities.

  6. Business $ $ $ $ Year 1 $500k Year 2 $500k Year 3 $500k Year 4 $600k NMTCAllocation Application AllocationAgreement CDEApplication Application Year 5 $600k Year 6 $600k Year 7 $600k Tax Liability Investor(s) CDFI Fund Total $3.9mil • 2011 Application: • 75 pages • 47 questions Business Strategy Community Impact Management Capacity Capitalization Strategy Info Re: Previous Awards • Community centers • Libraries • Health care facilities • Boys and girls clubs • Charter schools • Museums • Grocery stores • Drug rehab facilities $10Mil x 39% $3.9 Mil = $3.5 Bil • Community centers • Libraries • Health care facilities • Boys and girls clubs • Charter schools • Museums • Grocery stores • Drug rehab facilities NMTCs QEIs “Qualified Equity Investments” • Corporations • Partnerships • LLCs taxed as corporations or partnerships Investment Authority CDE 39% “Community Development Entity” Examples of QALICBs might include but are not limited to: Examples of QALICBs might include but are not limited to: 85% $10 M $1.365 Bil $ = “Substantially All” of $3.9 Mil NMTCs “Qualified Low-Income Community Investments” QLICIs “Qualified Active Low-Income Community Businesses” QALICBs Low-Income Communities “ ”

  7. Program Definition CDEsmust use… SubAll of the proceeds from… QEIsto make… QLICIsin… QALICBslocated in… LICs.

  8. $ $ $ $ Tax Liability Investor(s) CDFI Fund $10Mil x 39% $3.9 Mil = • Community centers • Libraries • Health care facilities • Boys and girls clubs • Museums • Drug rehab facilities $3.5 Bil QEIs NMTCs QEIs Investment Authority CDE CDE 39% Examples of QALICBs might include but are not limited to: 85% $10 M $1.365 Bil $ “Substantially All” of = “Substantially All” of $3.9 Mil NMTCs QLICIs QLICIs QALICBs QALICBs “Low-Income Communities” “Low-Income Communities”

  9. $ $ $ $ Tax Liability Investor(s) CDFI Fund $10Mil x 39% $3.9 Mil = • Community centers • Libraries • Health care facilities • Boys and girls clubs • Museums • Drug rehab facilities $3.5 Bil NMTCs QEIs Investment Authority CDE 39% Examples of QALICBs might include but are not limited to: 85% $10 M $1.365 Bil $ = “Substantially All” of $3.9 Mil NMTCs QLICIs QALICBs “Low-Income Communities”

  10. RECAPTURE $ $ $ 100%RECAPTURE Tax Liability Investor(s) CDFI Fund $10Mil x 39% $3.9 Mil = $3.5 Bil NMTCs QEIs Investment Authority CDE 39% 85% $10 M $1.365 Bil $ = “Substantially All” of $3.9 Mil NMTCs QLICIs QALICBs “Low-Income Communities”

  11. $ $ $ Credit Recapture Year 1 5% IRC § 45D(g)(3) Year 2 5% Year 3 5% 100%RECAPTURE Year 4 6% Year 5 6% Year 6 6% Recapture can happen if… Year 7 6% Investor(s) Total 39% 1. 2. 3. CDE ceases to be a qualified CDE $10Mil QEIs CDE 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  12. $ $ $ Credit Recapture IRC § 45D(g)(3) 100%RECAPTURE Recapture can happen if… Investor(s) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test $10Mil QEIs CDE < 85% 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  13. $ $ $ Credit Recapture IRC § 45D(g)(3) 100%RECAPTURE Recapture can happen if… Investor(s) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE * $ $10Mil QEIs CDE 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  14. $ $ $ Credit Recapture IRC § 45D(g)(3) Investor(s) $10Mil QEIs Recapture CDE 85% $ = “Substantially All” of QLICIs QALICBs Bankruptcy “Low-Income Communities”

  15. $ $ $ Credit Recapture IRC § 45D(g)(3) How about the foreclosure of the mortgage on a commercial rental real estate QALICB? Investor(s) $10Mil QEIs Recapture CDE 85% $ = “Substantially All” of QLICIs FORECLOSURE QALICBs “Low-Income Communities”

  16. $ $ $ Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE 100%RECAPTURE Recapture can happen if… Investor(s) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE $10Mil QEIs CDE 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  17. Business Business $ $ $ Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE Investor(s) QLICI Reinvestment $10Mil QEIs CDE “Sub All” 85% $ = “Substantially All” of 70% 90% $9Mil $7Mil $2Mil $2Mil QLICI QLICIs QLICI QALICBs “Low-Income Communities” QALICB QALICB 100%RECAPTURE

  18. Business Business Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE QALICB QALICB 100%RECAPTURE

  19. Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE ≥85% ≥85% ≥85% ≥85% ≥85% ≥85% ≥75% ≥85% ≥85% 84.99% ≥85% ≥85% ≥85% ≥85% 84.99% ! 100%RECAPTURE !

  20. Business Business Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE QALICB QALICB 100%RECAPTURE

  21. Business Business $ $ $ Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE 100%RECAPTURE Investor(s) * $ > $250k ≤ $250k $ Recapture event? QEIs Y__ N__ CDE $250k Operating Income $ QLICI QLICIs QALICB “Low-Income Communities” QALICB QALICB 100%RECAPTURE

  22. $ $ $ Credit Recapture IRC § 45D(g)(3) 100%RECAPTURE Recapture can happen if… Investor(s) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE $10Mil QEIs CDE 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  23. $ $ $ $ The Leveraged Structure ? $0.68 – $0.72 $7.2 – 7.4 Mil $2.6 – 2.8 Mil Loan Equity $2.56 Lender(s) Investor(s) ROI $ $3.9 Mil $10Mil Interest x 39% $3.9 Mil = NMTCs • Community centers • Libraries • Health care facilities • Boys and girls clubs • Museums • Drug rehab facilities NMTCs QEIs $10Mil CDE Fund QEIs $ Distribution Examples of QALICBs might include but are not limited to: $ $ Interest ?

  24. Learning journey “Nonqualified financial property” “Portion of a business” “Direct tracing method” “Targeted populations” “Reasonable expectation” “Springing control” “Sin business” “Sub-all” “Reinvestmentrequirement” ? ? ? ? ? ?

  25. Intro slide Novogradac Search iTunes Brad Elphick, CPA brad.elphick@novoco.com

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