26 U.S.C. § 45D — New markets tax credit

(a) Allowance of credit. If a taxpayer holds a "qualified equity investment" in a community development group on a "credit allowance date," the taxpayer gets a credit equal to a percentage of what the taxpayer originally paid for that investment. The percentage is 5% for the first three credit allowance dates, then 6% for the rest. The first credit allowance date is the day the investment was made; each of the next six anniversaries of that day is also a credit allowance date, so the credit is claimed across seven dates total. (b) Qualified equity investment. An investment counts as "qualified" if: the taxpayer bought it new (not secondhand) using only cash; the community development group used almost all that cash to make qualified low-income community investments; and the group designated the investment for this credit. An investment stops counting if it is issued more than 5 years after the group got its funding allocation; unused allocations can be given to someone else by the Treasury. A group cannot designate more investments than the amount of allocation it was given. The "used for low-income investments" rule is treated as met if at least 85% of the group's total assets are invested in qualified low-income community investments (a safe harbor). If someone buys the investment later, it still counts as qualified as long as it was qualified when the very first holder had it. Rules like those in section 1202(c)(3) apply if the investment is redeemed. "Equity investment" means either stock in a corporation (but not certain "nonqualified preferred stock") or a capital interest in a partnership. (c) Qualified community development entity. A group counts as a "qualified community development entity" if its main mission is serving or investing in low-income communities or people, if people from those communities help govern or advise it, and if the Treasury certifies it. Certain small business investment companies, and certain community development financial institutions, are automatically treated as meeting these requirements. (d) Qualified low-income community investments. This includes: money invested in or loaned to a qualifying low-income-area business; buying a loan from another qualified group; giving financial counseling or other approved services to businesses and residents in low-income areas; or investing in or loaning to another qualified community development entity. A business counts as a "qualified active low-income community business" if, for the year: at least 50% of its income comes from an approved business located in a low-income area; most of its property and its employees' work are in a low-income area; less than 5% of its property (by value) is collectibles it is not selling as part of its business; and less than 5% is "nonqualified financial property." This rule also covers a sole proprietor's business, treated as if it were incorporated, and applies separately to each part of a larger business. "Qualified business" borrows its meaning from section 1397C(d), with two tweaks: renting out real property in a low-income area counts as qualified if the property has real improvements on it, and one exclusion in that other section does not apply here. (e) Low-income community. A census tract is "low-income" if its poverty rate is at least 20%, or if median family income there is no more than 80% of the state (or metro-area) median. In U.S. territories, the territory's own median income is used instead of the state's. Treasury can write rules letting certain other groups of people count as living in a low-income community too. In places without census tracts, equivalent county divisions are used instead. A tract with under 2,000 people still counts as low-income if it is inside an empowerment zone and touches another low-income tract. In a county that lost at least 10% of its population to migration over 20 years, the 80% income test becomes an 85% test, making it a little easier to qualify. (f) National limit on investments. There is a yearly nationwide cap on how much credit-eligible investment can be designated: $1 billion for 2001; $1.5 billion for 2002–2003; $2 billion for 2004–2005; $3.5 billion for 2006–2007; $5 billion for 2008; $5 billion for 2009; $3.5 billion each year from 2010 through 2019; and $5 billion every year after 2019. The Treasury divides this cap among qualified groups, giving priority to groups with a strong track record helping disadvantaged businesses, or that plan to invest mostly in businesses majority-owned by people unrelated to the group. If a year's cap is not fully used, the leftover rolls into the next year's cap — but leftovers cannot be carried more than 5 years past the year they came from, and leftovers from before 2026 are all treated as if they came from 2025. (g) Recapture. If, within 7 years of the investment being made, a "recapture event" happens, the taxpayer's taxes go up that year by the credit already claimed for that investment, plus interest at the IRS underpayment rate, running from when each year's tax return was due. That interest cannot be deducted. A recapture event happens if the community development group loses its certification, if the invested cash stops being used the required way, or if the investment is redeemed by the group. The extra tax only applies to the part of the credit that actually reduced the taxpayer's tax bill; unused credit amounts get adjusted through the normal carryforward and carryback rules instead. This recapture tax does not count as a regular tax for certain other credit calculations. (h) Basis reduction. When a taxpayer gets this credit, the investment's basis (its tracked cost for tax purposes) must be reduced by the credit amount. This rule does not apply for purposes of section 1202. (i) Regulations. The Treasury must write rules to carry out this section, including rules that limit the credit when an investment already gets other federal tax breaks, prevent abuse, explain how the "used for low-income investments" test is met, set reporting requirements, apply the rules to newly formed groups, and make sure non-metro counties get their fair share of investment.