For many community development entities (CDEs), new markets tax credit (NMTC) compliance reporting has become a yearlong process that requires dedicated resources and attention. In a recent Novogradac Tax Credit Tuesday podcast, I spoke with Michael Novogradac, CPA, about NMTC compliance reporting and what may happen to CDEs that fall out of compliance. Additionally, we discussed the Community Development Financial Institutions (CDFI) Fund’s role in the compliance process.

NMTC Compliance Overview

The 2021 round of the NMTC was awarded in October 2022, and CDEs that were awarded NMTCs in previous application rounds are beginning the compliance reporting process. The rounds are currently one year behind the calendar year, so it is expected that the 2022 round will be announced in late 2023.

Each year, allocatees must submit four different reports to the CDFI Fund that detail the progress that the CDE is making on its established goals, which were created when the CDE applied for allocation issuance authority. The first report is an annual audit of the CDE, followed by an institution-level report (ILR), which gathers information about the CDE itself and its financial position, and includes IRS compliance questions. The third report is a transaction level report (TLR). These reports are incredibly important to the CDFI Fund because they determine how effective the incentive is and how it can be improved. The fourth report is a qualified equity investment (QEI) closeout report and has information pertaining to the status of the investment, the borrower and quantifies the residual value that the borrower obtained during the unwind process.

An allocatee has 180 days from the end of its fiscal year to complete the IRL, the TRL and upload its audit, which must be completed by an independent certified public accounting firm. Many times, allocatees expect the timeline to be six months, but the requirement is exactly 180 days.

If an allocatee does not submit these four reports, the CDE becomes in default of the allocation agreement. This will not trigger a recapture from the IRS, but the CDE could be penalized through the scoring process of future applications or become ineligible for future rounds. Therefore, it is important for continued success and growth of the allocatee to remain in compliance with NMTC requirements.

Why the CDFI Fund Collects Data

The CDFI Fund collects data in these four reports to evaluate the effectiveness of the NMTC, and to ensure that CDEs are in compliance with CDFI Fund standards. Through the transaction level report, the CDFI Fund first checks that an allocatee is in compliance with the program and secondly, in compliance with the requirements of its allocation agreement.

The CDFI Fund can also use this data for peer analysis, comparing two different CDEs against each other, to ultimately understand the different markets targeted by the CDE within the program. Government organizations, like the Government Accountability Office can also use this data to publish reports or make recommendations to improve the program.

The NMTC program is set to expire in 2025, so data collection is important for program advocacy to show effectiveness.

Four Tips for NMTC Compliance

The first tip to ensure a successful compliance process is to hire a team that is familiar with these requirements. CDEs can be different sized organizations, but typically only have one person or a small group of people that complete the annual reporting requirements. This becomes a problem when these people leave the CDE and create a void of institutional knowledge. The best way to combat this is to invest in the CDE reporting team. Additionally, it will prove important to diversify and delegate duties. CDEs should also invest time and resources in training employees and allow the team to understand the Awards Management Information System (AMIS). AMIS is a database that supports all CDFI Fund programs through the project cycle. Novogradac offers webinars, conferences and other resources to help with compliance. One such resource is the New Markets Tax Credit Working Group, which discusses reporting requirements, AMIS, policy changes and more.

Secondly, don’t delay in completing the reporting requirement. Staying on schedule is important in the compliance process. The ILR is not a complex form, but the TLR may require up to 200 datapoints for any new transaction. However, after the first year, the number of datapoints required drops to between 20-25. Nonetheless, CDEs should begin gathering information at least a month before the deadline. Novogradac’s NMTC Working Group recently commented on the TLR Data Point Guidance for AMIS released in December 2022, providing comments, considerations and recommendations the group believes would increase the effectiveness and efficiency in which CDEs can report data to the CDFI Fund related to the use of their NMTC allocation. In addition to the amount of data that needs to be gathered, another reason to start early is the reporting system, AMIS, may run into technical issues throughout the process.

Third, begin thinking about the reporting process during the closing process for compliance reporting. With the creation of multi-CDE reporting a number of years ago, CDEs are required to agree upon certain data point entries and collectively enter the same information within AMIS. When multiple CDEs are involved in a transaction, this specific reporting eliminates the potential for “double-counting” project outcomes like jobs. Despite this easier function, it is still important to collect information for these datapoints during the compliance reporting process because there are still open lines of communication between other CDEs, the investor and the borrower.

Finally, take advance of interim certification. The interim certification is a mechanism recently introduced by the CDFI Fund through AMIS. This mechanism allows CDEs to validate new transactions throughout the year rather than wait until the final certification timeframe (180 days after year-end). For example, CDEs could close an investment and within a few weeks, this information could be uploaded into AMIS and validated. The interim certification process is closely associated with the application process and allows the CDFI Fund to ensure applicants are continuing to remain in compliance.

Novogradac Resources

In addition to the publications and trainings Novogradac offers to support NMTC compliance, Novogradac’s knowledgeable NMTC team provides  NMTC compliance services, including reviewing data points used for NMTC compliance and assisting with the uploading process into AMIS. Novogradac can also complete an agreed-upon procedures report by gathering the datapoints for the reporting portion of the compliance process.

For more information on NMTC compliance reporting, download Novogradac’s Feb. 21, 2023, Tax Credit Tuesday podcast.