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How the Federal New Markets Tax Credit Works

Since its inception in 2000, the federal New Markets Tax Credit (NMTC) Program has made 836 investment authority awards, allocating a total of $40 billion in tax credit authority to CDEs through a competitive application process. The NMTC Program is administered through the Community Development Financial Institution Fund (CDFI Fund), which is located within the administrative structure of the U.S. Treasury.

Step 1 - Obtain certification as a community development entity (CDE) from the CDFI Fund.

Step 2 - Apply for an allocation of investment authority from the CDFI Fund. (Highly Competitive)

Step 3 - The CDE enters into an allocation agreement with CDFI Fund, which specifies compliance requirements including terms, conditions, monitoring, auditing, and reporting requirements.

Step 4 - Secure investors and raise the qualified equity investment (QEI) in exchange for a 39% tax credit, which the taxpayer earns over a 7-year investment period.

Step 5 - One year from the effective date of the allocation agreement, the CDE is required to demonstrate to the CDFI Fund that at least 85% of the QEI is deployed in one or more qualified low income community investments (QLICIs).  Among other low income community investments, QLICIs may be placed with qualified active low income communities businesses (QALICB).

Step 6 - In each of the following years, the CDE must demonstrate to the CDFI Fund that the QUI remains in QLICIs in QALICB, submit audited financial statements, and report on the impact of those investments on the low income communities.  These reports are made through the Community Investment Impact System.

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