Reported Reforms Could Improve New Markets Tax Credit

Published by Michael Novogradac on Friday, June 1, 2012 - 12:00am

On May 16, the White House released a report entitled “Moving America’s Small Businesses & Entrepreneurs Forward.” The report is billed as a comprehensive look at what investments the Obama Administration has done to support small businesses.

Tucked away on page 14 of the 87-page report is an interesting tidbit that may be the first public release of information about an effort related to the new markets tax credit. Under the heading “Simplifying Tax Credits” the report says:

“The Treasury Department is working on a set of regulatory reforms to the existing New Markets Tax Credit that will make it easier for community development entities to attract private sector funds for investment in startups and small businesses operating in lower‐income communities. The reforms, which are expected to go into effect later this year, will relax the reinvestment requirements for community development entities investing in certain operating businesses.”

The New Markets Tax Credit Working Group has submitted comments to the Treasury Department on this topic and we applaud the administration for making progress on these improvements.

Reinvestment risk is a major concern for investors who make capital contributions into CDEs that invest in non-real estate operating businesses. Operating businesses typically don’t need investments with a seven-year term or longer; they typically have a need for a much shorter term investment. If an investment is made with a term shorter than seven years, then the CDE must be able to reinvest the proceeds of the investment within 12 months. If the CDE is unable to reinvest the proceeds, tax credit recapture may be triggered. The net result is that many investors have favored the simplicity and security of seven-year real estate NMTC investments.

If the revised reinvestment requirements do in fact make it easier for CDEs to invest in certain operating business, the changes will be a welcome improvement to the new markets tax credit program.