On Dec. 21, 2000, the Community Renewal Tax Relief Act of 2000 was signed into law, providing $15 billion in tax incentives under the New Markets Tax Credit Program to help spur economic growth in new markets in urban and rural communities.
By making an equity investment in an eligible Community Development Entity (CDE), investors can receive a New Markets Tax Credit worth more than 30 percent of the amount invested over the life of the credit, in present value terms.
The program, overseen by the Community Development Financial Institutions Fund, was implemented because although markets in inner cities and distressed rural areas possess enormous untapped economic potential, growing businesses in these communities are unlikely to attract the attention of venture capitalists who generally work within their existing relationships and communities. CDEs can offer a lucrative incentive to invest in those areas.
Businesses apply for CDE certification by forming a subsidiary to apply for certification or by working with existing CDEs. Entities already certified as either a Community Development Financial Institution or a Specialized Small Business Investment Company only need to register, rather than apply for certification. Small businesses can visit www.cdfifund.gov to determine which entities in their area have received CDE designation.
To qualify, an entity must be a domestic corporation or partnership with a primary mission of serving or providing investment capital for low-income communities or persons, and that maintains accountability to residents through their representation on a governing or advisory board. CDEs may be nonprofit or for-profit, but only for-profits can provide tax credits to investors.
The entity must also explain how it will maintain accountability through the board — how board members will be selected, how often it will meet and solicit feedback from residents of low-income communities, etc. The accountability requirement allows residents and business owners to be heard in the development of their communities.
Once an entity is certified, it may apply for an allocation of credits that it can make available to investors. The administrators at the fund say the allocation application process will be competitive. Once a CDE receives and issues credits to investors, investors receive a tax credit equal to a percentage of the cash paid to the CDE. These investments are transferable to other qualified investors.
The credit is available for seven years, unless a CDE ceases to be qualified, the proceeds of the investment cease to be used as required or the investment is redeemed by the CDE. These are called recapture events, and carry severe penalties.
As of June 20, 2002, there were 11 entities certified to offer tax incentives for investments in low-income communities in Ohio. These entities provide businesses in low-income areas with additional financing options.
The New Market Tax Credit Program is an excellent vehicle for providing low-risk investment opportunities and infusing capital into areas that are often overlooked. Small businesses, particularly those with significant operations in inner cities or distressed rural areas, should strongly consider seeking help from their CDEs. Renee C. Khoury is an attorney with the Columbus office of Vorys, Sater, Seymour and Pease LLP, tax group, (614) 464-6400.
