Numerous Priority Issues Have the NMTC Working Group Looking Beyond 2023 to 2025
Until the new markets tax credit (NMTC) is made an indefinite part of the Internal Revenue Code, permanence will remain at the top of the NMTC Working Group’s list of priorities.
Since its creation in 2006, each year at this time the NMTC Working Group monitors the legislative landscape for potential vehicles to which legislation to make the NMTC permanent can be attached. Last year, hope rested on the passage of the reconciliation bill passed by the House in November 2021, the Build Back Better Act (BBBA). Ultimately, the reconciliation bill signed into law in August (the Inflation Reduction Act of 2022, or the IRA) was stripped of the community development provisions included in the BBBA to garner the support needed to pass in the Senate. Still, there are potential vehicles for NMTC legislation, which include year-end tax legislation and the fiscal year (FY) 2023 omnibus spending bill.
Though permanence is the highest priority, other issues–most notably the timing of the remaining four allocation rounds of NMTC allocations authorized under a five-year extension of the NMTC as part of the Consolidated Appropriations Act of 2021–will profoundly affect NMTC stakeholders and thus will be on the NMTC Working Group’s radar in 2023 and beyond.
Nearly three years after the start of the pandemic, the NMTC Working Group continues work to mitigate negative impacts. As the economy recovers from COVID-19-related setbacks, an effort which has been hampered by record levels of inflation seen this year, the NMTC Working Group had numerous conversations with the Community Development Financial Institutions (CDFI) Fund regarding issues related to the pandemic. In March, the group discussed the need for an extension of the 36-month lookback deadline for CY2015-2020 NMTC allocation agreements with the CDFI Fund. Earlier this year, the ability to use the extended 36-month lookback provision was limited to transactions between June 1, 2020, and May 31, 2022. On May 3, the CDFI Fund announced an extension to transactions closed by Dec. 31, 2022. Through the NMTC Working Group, members were able to share examples of transactions that would be negatively impacted if the May 31 deadline was not extended.
Another area where the NMTC Working Group will be requesting guidance and relief is around the services performed test. Looking ahead, the NMTC Working Group will engage the Internal Revenue Service (IRS) on behalf of qualified businesses in low-income communities, community development entities (CDEs) and investors that participate in the NMTC program. Comments and recommendations will be provided with the aim of assisting the IRS in delivering timely guidance regarding a COVID-19 response to issues impacting the services performed test. In short, the issue that CDEs and potential qualified active low-income community businesses are struggling with regarding the services performed test is whether employees that now work from home because of the pandemic have to be verified as living in a low-income community. Accepted practices before the pandemic no longer apply universally post-pandemic and the NMTC Working Group will encourage the IRS to address the changing realities caused by the pandemic.
The NMTC Working Group continues to engage the banking regulatory agencies on the Community Reinvestment Act (CRA). On May 5, the three main federal banking regulatory agencies–the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation–jointly issued a Notice of Proposed Rulemaking (NPR) to reform CRA regulations. Though the NPR, which represented the first major change to CRA rules in more than 25 years, was a substantial improvement over changes issued between 2018 and 2020, as proposed, community tax credit stakeholders still had cause for concern. To avoid unintended negative effects from the rule changes, the NMTC Working Group submitted a comment letter Aug. 5 that included recommendations to ensure that the CRA continues to robustly support community development investment through the NMTC. The main recommendations in the letter focused on the group’s concerns about eliminating the investment test, the higher weighting of the proposed retail test over the proposed community development test, and on reforming assessment areas for purposes of CRA examinations, especially with regard to establishing how and where assessment areas are determined.
Future NMTC Allocation Rounds
With the announcement of the calendar year (CY) 2021 allocation award Oct. 28, the main question stakeholders have for the CDFI Fund is when the CY 2022 allocation round will be opened. The CDFI Fund has expressed a desire to open rounds within the year for which allocations were being made available, which in theory would mean that the CY 2022 round would have to open during the remaining months of this year. The issue is not necessarily when the round opens but when applications would be due. The NMTC Working Group has been working to form a consensus on what would be the optimal time to open the round before engaging the CDFI Fund. While the industry does not want the CY 2022 allocation round to open too early, having it slip later into 2023 is also not ideal. As the NMTC Working Group looks ahead to 2023 and beyond, conversations with the CDFI Fund on the timing of the CY 2022 round, as well as future rounds, will include what the timing of allocation rounds could mean for discussions on extension and, preferably, permanence of the NMTC, as detailed below.
Comments submitted by the NMTC Working Group on the CY 2022 allocation round will include recommendations on how to enhance the efficiency of the application process for CDEs through improvements to the application process. Further, the NMTC Working Group will propose changes to improve the ability of not only new and emerging CDEs to participate, but also those CDEs who have faced barriers to entry.
Once the CY 2022 round is opened and the 2022 allocation application is available, members will receive exclusive application tools designed to make understanding the newest application and how it differs from the 2021 application, easier. This package of tools is provided to members at the opening of each round and is an important benefit of membership. As the NMTC Working Group works through the new application, any member requests for clarification regarding changes from the previous year’s application will be discussed and possibly brought to the CDFI Fund.
GAAP Working Group and NMTCs
One of the advantages of membership in any one of Novogradac’s working groups is being able to benefit from the work of the other groups. The Novogradac GAAP Accounting for Tax Credits Working Group (GAAP Working Group), led by Brad Elphick, the Novogradac partner who also leads the NMTC Working Group, was created in 2021. The GAAP Working Group was created for the express purpose of engaging the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB), which announced in late 2021 that it was open to considering the expanded use of the proportional amortization method to account for investments in tax credit structures to the NMTC, among other tax credits. The GAAP Working Group submitted a comment letter to FASB Oct. 6, championing the extension of favorable treatment to the NMTC, historic tax credit and renewable energy tax credits. Actions taken by EITF and FASB will be included among the priority issues of the NMTC Working Group and Novogradac’s Renewable Energy Working Group. Under the leadership of Elphick, the NMTC Working Group membership will work closely with that of the GAAP Working Group to ensure the NMTC benefits from FASB’s willingness to consider favorable tax accounting treatment for the NMTC.
The timing of the remaining allocation rounds that are part of the five-year extension taking the NMTC through 2025 could influence the discussion for NMTC permanence. Past timelines show the CDFI Fund has taken at least 14 months between the allocation award announcements of the prior round to an announcement for the current round. So as not to impede the discussion about NMTC permanence, it is imperative the remaining allocation rounds be completed in a timely manner. One could argue an extension beyond 2025 or even permanence is not needed if there are remaining rounds to be allocated past 2025, due to the 14-month cycle described above. The NMTC Working Group will consider what the timing discussion could mean as it continues its fight for NMTC permanence.
In addition to the issues identified above, the NMTC Working Group will continue its tradition of submitting a list of NMTC issues that should be prioritized by the IRS. For inclusion in the 2022-2023 Priority Guidance Plan, the NMTC Working Group intends to submit matters concerning existing NMTC rules and regulations, that, if pursued and adopted by Treasury, will increase the effectiveness and efficiency of the NMTC. As in years past, the comment letter will stress that permanence for the NMTC would remove any remaining uncertainty surrounding the long-term future of the program. Further, any permanent extension of the NMTC should include provisions that eliminate the basis reduction and that would allow the NMTC to offset the alternative minimum tax. On the regulatory front, the issue at the forefront of the group’s recommendations will be that the IRS examine the way tax credit recapture is determined.
In addition to permanence and the timing of the opening of the CY 2022 application round, CRA modernization and adjusting to a “post-pandemic” reality will be priority issues for the NMTC Working Group into 2023. As 2022 draws to a close, the results of the midterm elections and what this means for lame duck congressional session will also factor into how the group prepares for 2023. A change in control of the House and or the Senate will affect not only what can be accomplished by Congress in the closing weeks of the year but legislative priorities for the next two years, which will affect all the community development tax credits, not just the NMTC.
As we approach 2025, it will be even more important than ever to understand the issues facing the NMTC community. Industry participants should consider joining the NMTC Working Group to not only be kept apprised of what’s happening in the industry, but to ensure issues and concerns that are crucial to them are brought before those who make decisions about the future of the incentive. In addition to giving voice to members, the NMTC Working Group accepts input from nonmembers when drafting comment letters, recommended practices and other content. To join the group or submit input on NMTC topics please contact Brad Elphick at [email protected].