At Arkansas Capital, our goal is creating partnerships between Arkansans and the lending community. We have been worked with our subsidiary, Heartland Renaissance Fund, LLC (HRF), to deploy $200 million in New Market Tax Credit (NMTC) to Arkansas communities. HRF is one of the largest Arkansas-focused community development entities (CDEs) and a multi-round recipient of the U.S. Treasury’s New Market Tax Credit Allocation.
Now, you may be asking “what are New Market Tax Credits?” Keep reading to answer that question and find out about the important New Market Tax Credits program offered by Arkansas Capital through HRF.
New Market Tax Credits
New Market Tax Credits (NMTC) are a federal tax incentive aimed at spreading investment and economic development to low-income areas in the United States. Since its inception in 2000, NMTC has facilitated the establishment of 4,800 projects spread across all 50 states.
The incentive program works by allowing a 39% tax credit to qualified investors. This increases value by reducing tax expenses. Despite the benefits accrued by a new investment or company, not many investors understand the incentive tax program.
Here, we will explain:
- What is Tax Credit Investment?
- Is Tax Credit good or bad?
- What are New Market Tax Credits?
- What does it mean to be NMTC Qualified?
- What can New Market Tax Credits be used for?
- What is a New Market Tax Credit Loan?
What Is Tax Credit Investment?
Tax Credit Investment is a means of making an investment that helps socially, environmentally, or even governmentally. The government uses tax credits to encourage growth in necessary areas of the economy. A Tax Credit Investment almost guarantees a return on your investment by getting a higher tax return or paying less taxes during tax season.
Depending on the specific tax credit program, Tax Credit Investments can be great ways to invest in socially conscious ways. New Market Tax Credits, for example, encourage growth in low-income areas. Others might prompt green energy resources or improve diversity.
Is a Tax Credit Good or Bad — And What Is It?
A tax credit is the sum of money an investor or taxpayer is allowed to deduct from payable taxes. As a taxpayer, you already know taxes reduce your net income because they are an essential payment when you make money. A tax credit increases your net income by reducing your liability to the state.
Most taxpayers consider a tax credit to be a good thing. While both credits and deductions make what you owe in taxes decrease, they do so in very different ways. Tax credits in particular reduce the amount of taxes you owe dollar by dollar. You may pay less back in taxes, or you might get a higher refund.
What is the downside of receiving a tax refund like this? Because the New Market Tax Credits are specifically intended for low-income communities, these projects or businesses may not be as successful as they would be in more industrialized or higher-income areas. While you do receive the tax credit, the program can have this downside for investors.
The other downside of receiving a tax refund through what is called Tax Credit Investments is that there can be a lot of hoops to jump through. Certain requirements must be met and the types of programs or businesses may be limited by the rules of the tax credit in question.
What Are New Market Tax Credits (NMTC)?
New Market Tax Credits are a specific tax credit applicable only to projects or businesses investing in low-income areas. The tax credit works as an incentive for investors to initiate projects in New Market Tax Credit qualified areas.
NMTC offers a 39% tax credit to new investors over 7 years. The tax credits are split into two phases: a tax credit of 5% of your initial investment for the first three years and 6% for the remaining four years. However, the tax credits are only achieved through Community Development Entities (CDEs).
Who are Community Development Entities (CDEs)? CDEs are investment units that serve low-income communities. The advisory board of a qualifying CDE must be composed by at least 20% of local community members. NMTC are awarded to CDEs, who then attract investors to provide equity and receive tax credits in return.
What Are New Market Tax Credits For?
New Market Tax Credit are intended to encourage investments and development in all the forgotten corners of the United States, particularly those suffering from widespread poverty or low-income status. The program works under the assumption that investors may shy away from investing in areas considered less productive.
As an investor, the location of your business is a key area of concern. To compensate for the expectation of perceived low returns, the government allows you to deduct 39% of income tax from the total tax payable over 7 years. The tax credit reimburses the income you might have earned in a more favorable location. Using the New Market Tax Credit investment makes seemingly poor business locations more viable, attracting investors.
What Does It Mean To Be NMTC Qualified?
An NMTC qualified investor intends to start or expand a business into designated low-income communities by working with CDEs. Low-income communities are census tracts with a poverty level of at least 20%, family incomes 80% less than the area median, or a non-metropolitan census tract exhibiting certain signs of distress based on Census data.
Eligibility for the New Market Tax Credits is also qualifying a business as Qualified Active Low Income Community Businesses (QALICBs). Investors through the New Market Tax Credit must meet certain conditions.
What Can New Market Tax Credits Be Used For?
What does it mean to be NMTC Qualified? The projects and businesses that qualify for New Market Tax Credits must meet any of the following criteria in addition to operating in low-income communities:
- The project provides business loans to businesses owned by women and minority communities. These loans provide capital for small and medium businesses to increase development.
- The investment must create quality employment for qualifying communities. Most NMTC qualified investors operate in areas whose unemployment rates are one and a half times higher than the national average.
- Qualified NMTC investors must also demonstrate their commitment to environmental sustainability. Low-income communities may face poor conditions, such as insufficient clean water. Rehabilitation works are also included in the eligible projects under the environmental sustainability programs.
- Providing amenities like healthcare and education services in low-income communities are also eligible for NMTC. Other qualifying projects include affordable housing and real estate developers who offer flexible rent arrangements for tenants.
What Is a New Market Tax Credit Loan?
Once you know what New Market Tax Credits are, what a New Market Tax Credit Loan means is an easy guess. In addition to what NMTC kickbacks, the NMTC program also offers loans to encourage business growth in economically distressed areas. A New Market Tax Credit Loan provides financing for borrowers to buy, build, or renovate space for their business or organization in low-income areas. This is arranged through the CDE of the area.
Research shows that some NMTC qualified projects would work even without incentives. The apparent low return from investments in low-income communities may turn into an advantage. Investments in poverty-stricken areas sometimes generate returns equal to what might be expected in any location. Subsequently, the tax credit becomes an additional, bonus return for businesses in low-income communities.
Let Us Help You Grow
If you are looking for a CDE to get started with the New Market Tax Credits program, Arkansas Capital Corporation can help. In addition to deploying $200 million in NMTC capital, we have worked with HFR to fund 35+ projects, and create or retain 3,538 jobs. Let us help you today! Contact Arkansas Capital at 800-216-7237 or 501-374-9247.