Q&A: Is the NMTC Compliance Period Seven Years? Or Nine?

Published by Owen P. Gray, CPA on Monday, August 1, 2011
Journal thumb August 2011

Question: How long is the new markets tax credit (NMTC) compliance period?

Answer: According to Internal Revenue Code (IRC) Section 45D and the Treasury Regulations, the NMTC is claimed over a period of six years and a day. However, the NMTC compliance period is seven years from the date of the qualified equity investment. It is important to note that each individual qualified equity investment has its own seven-year compliance period. For example, if a community development entity (CDE) made one qualified equity investment (QEI) on June 30, 2010 and one QEI on January 15, 2011, the CDE has two compliance periods. The first compliance period ends seven years from the date of the first qualified equity investment (i.e. May 31, 2017) and the second compliance period ends seven years from the date of the second compliance period (i.e. January 14, 2018).

The compliance periods described above are based on IRC Section 45D and the Treasury Regulations. However, all NMTC allocatees have a second set of compliance requirements to which they must adhere. These parallel sets of requirements are found in the NMTC allocation agreement. The key provision under the NMTC allocation agreement is section 9.13:

“Termination. Unless otherwise mutually agreed upon in writing by the parties hereto, this Allocation Agreement shall terminate at such time that:

the Fund determines that the Allocatee has submitted to the Fund all reports required by this Allocation Agreement covering the 7-year credit period (as defined in 26 C.F.R. 1.45D-1(c)(5)(i)) after the Allocatee issues its last Qualified Equity Investment related to its NMTC Allocation; and

the Fund determines that the NMTC Allocation has been used as permitted hereby or two years after the 7-year credit period (as defined in 26 C.F.R. 1.45D-1(c)(5)(i)) after the Allocatee issues its last Qualified Equity Investment related to its NMTC Allocation, whichever date is earlier.”

This last clause is the one that may cause concern for CDEs. This clause indicates that the compliance period under the NMTC allocation agreement may actually extend for two years after the end of the seven-year credit period. There are two reasons this clause may be cause for concern for CDEs: there is uncertainty as to whether the compliance period is for seven years or nine years; and many NMTC transactions have been structured to only cover administrative costs for the seven-year compliance period.

As noted above, one of the biggest concerns is determining whether the compliance period is seven years or nine years. The NMTC allocation agreement leaves this decision to the discretion of the CDFI Fund. It does not indicate how the CDE will know whether the CDFI Fund has determined the compliance period is seven years or nine years for purposes of the NMTC allocation agreement. This is especially timely as the first round QEIs are currently reaching the end of seven years since their funding.  

The NMTC Working Group and others have brought this issue to the attention of the CDFI Fund. The CDFI Fund has indicated it is studying the issue and expects to provide the NMTC industry with guidance on the issue. CDEs are advised to follow this issue closely, especially those with QEIs approaching the end of their seven-year compliance period.