The IRS has issued proposed regulations that should allow more investments in non-real estate businesses located in low-income communities to qualify for a new markets tax credit.

Through 2009, the new markets tax credit (NMTC) has helped approximately 3,000 businesses and real estate projects located in low-income communities amass $16 billion of investments. However, only 35 percent of the tax credit dollars was invested in active businesses, with the rest being invested in real estate activities.

Anyone who holds a qualified equity investment in a qualified community development entity (CDE) may be entitled to a new markets tax credit. The credit is 39 percent of the qualified equity investment spread over a seven-year credit period. Under certain conditions, the credit may have to be recaptured.

A community development entity is any domestic corporation or partnership:

• Whose primary mission is serving or providing investment capital for low-income communities or low-income persons
• That maintains accountability to residents of low-income communities through representation on governing or advisory boards of the entity
• That is certified by the Treasury Department as an eligible community development entity

A qualified equity investment is an equity investment in a qualified CDE if:

• The investment is so designated by the CDE;
• The investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash; and
• Substantially all (at least 85 percent, reduced to 75 percent for the final year of the seven-year credit period) of the cash is used by the qualified CDE to make qualified low-income community investments, including capital or equity investments in, or loans to, any qualified, active low-income community business or certain financial counseling and other services to businesses and residents in low-income communities.

Current requirements make it difficult for CDEs to provide working capital and equipment loans to non-real estate businesses. The proposed regulations, which would be effective when finalized, would ease these rules. For more information on the proposed rules, click here.