Q&A: Can a Hydroponic Facility be a QALICB?

Published by Elaine Chang on Friday, July 6, 2018
Journal cover thumb July 2018

Question: Can a hydroponic facility meet the requirements to be a Qualified Active Low-Income Community Business (QALICB)?

Answer: Treasury Regulation Section 1.45D-1(d)(5) defines what a qualified business is under the New Markets Tax Credit (NMTC) program and lists certain trades or businesses that are excluded from this definition. Some of these exclusions are a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. Additionally, Treasury Regulation Section 1.45D-1(d)(5)(C) states that “the term qualified business does not include any trade or business the principal activity of which is farming…”

Farming purposes is defined in Internal Revenue Code Section 2032A(e)(5):

  • cultivating the soil, or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for training, and management of animals) on a farm;
  • handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant or operator of the farm regularly produces more than one-half of the commodity so treated.

Additionally, Internal Revenue Code Section 2032A(e)(4) defines the term farm to include “stock, dairy, poultry, fruit, furbearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands.”

A hydroponic facility would seem to be considered as farming under the NMTC regulations and would not be a QALICB. However, there are possible alternative to allow the hydroponic facility to take part in the NMTC program. For example, if the proposed hydroponic business used the crops that were raised in a way that was different from its unmanufactured state, that would be considered an eligible business. Alternatively, structuring the deal differently than originally anticipated may help solve the problem. For example, the hydroponic facility could be an operating business that would lease the facility from a real estate QALICB. 

Although at first it may seem as though a hydroponic facility would not be eligible as a QALICB under the NMTC program, careful examination of the regulations may reveal the contrary. Additionally, careful deal structuring present solutions that weren’t previously seen. As such, businesses should always consult with qualified advisors.