Internal Revenue Code:Sec. 45D. New markets tax credit
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter A - Determination of Tax Liability
PART IV - CREDITS AGAINST TAX
Subpart D - Business Related Credits
Statute
Sec. 45D. New markets tax credit
(a) Allowance of credit
(1) In general
For purposes of section 38, in the case of a taxpayer who holds
a qualified equity investment on a credit allowance date of such
investment which occurs during the taxable year, the new markets
tax credit determined under this section for such taxable year is
an amount equal to the applicable percentage of the amount paid
to the qualified community development entity for such investment
at its original issue.
(2) Applicable percentage
For purposes of paragraph (1), the applicable percentage is -
(A) 5 percent with respect to the first 3 credit allowance
dates, and
(B) 6 percent with respect to the remainder of the credit
allowance dates.
(3) Credit allowance date
For purposes of paragraph (1), the term ''credit allowance
date'' means, with respect to any qualified equity investment -
(A) the date on which such investment is initially made, and
(B) each of the 6 anniversary dates of such date thereafter.
(b) Qualified equity investment
For purposes of this section -
(1) In general
The term ''qualified equity investment'' means any equity
investment in a qualified community development entity if -
(A) such investment is acquired by the taxpayer at its
original issue (directly or through an underwriter) solely in
exchange for cash,
(B) substantially all of such cash is used by the qualified
community development entity to make qualified low-income
community investments, and
(C) such investment is designated for purposes of this
section by the qualified community development entity.
Such term shall not include any equity investment issued by a
qualified community development entity more than 5 years after
the date that such entity receives an allocation under subsection
(f). Any allocation not used within such 5-year period may be
reallocated by the Secretary under subsection (f).
(2) Limitation
The maximum amount of equity investments issued by a qualified
community development entity which may be designated under
paragraph (1)(C) by such entity shall not exceed the portion of
the limitation amount allocated under subsection (f) to such
entity.
(3) Safe harbor for determining use of cash
The requirement of paragraph (1)(B) shall be treated as met if
at least 85 percent of the aggregate gross assets of the
qualified community development entity are invested in qualified
low-income community investments.
(4) Treatment of subsequent purchasers
The term ''qualified equity investment'' includes any equity
investment which would (but for paragraph (1)(A)) be a qualified
equity investment in the hands of the taxpayer if such investment
was a qualified equity investment in the hands of a prior holder.
(5) Redemptions
A rule similar to the rule of section 1202(c)(3) shall apply
for purposes of this subsection.
(6) Equity investment
The term ''equity investment'' means -
(A) any stock (other than nonqualified preferred stock as
defined in section 351(g)(2)) in an entity which is a
corporation, and
(B) any capital interest in an entity which is a partnership.
(c) Qualified community development entity
For purposes of this section -
(1) In general
The term ''qualified community development entity'' means any
domestic corporation or partnership if -
(A) the primary mission of the entity is serving, or
providing investment capital for, low-income communities or
low-income persons,
(B) the entity maintains accountability to residents of
low-income communities through their representation on any
governing board of the entity or on any advisory board to the
entity, and
(C) the entity is certified by the Secretary for purposes of
this section as being a qualified community development entity.
(2) Special rules for certain organizations
The requirements of paragraph (1) shall be treated as met by -
(A) any specialized small business investment company (as
defined in section 1044(c)(3)), and
(B) any community development financial institution (as
defined in section 103 of the Community Development Banking and
Financial Institutions Act of 1994 (12 U.S.C. 4702)).
(d) Qualified low-income community investments
For purposes of this section -
(1) In general
The term ''qualified low-income community investment'' means -
(A) any capital or equity investment in, or loan to, any
qualified active low-income community business,
(B) the purchase from another qualified community development
entity of any loan made by such entity which is a qualified
low-income community investment,
(C) financial counseling and other services specified in
regulations prescribed by the Secretary to businesses located
in, and residents of, low-income communities, and
(D) any equity investment in, or loan to, any qualified
community development entity.
(2) Qualified active low-income community business
(A) In general
For purposes of paragraph (1), the term ''qualified active
low-income community business'' means, with respect to any
taxable year, any corporation (including a nonprofit
corporation) or partnership if for such year -
(i) at least 50 percent of the total gross income of such
entity is derived from the active conduct of a qualified
business within any low-income community,
(ii) a substantial portion of the use of the tangible
property of such entity (whether owned or leased) is within
any low-income community,
(iii) a substantial portion of the services performed for
such entity by its employees are performed in any low-income
community,
(iv) less than 5 percent of the average of the aggregate
unadjusted bases of the property of such entity is
attributable to collectibles (as defined in section
408(m)(2)) other than collectibles that are held primarily
for sale to customers in the ordinary course of such
business, and
(v) less than 5 percent of the average of the aggregate
unadjusted bases of the property of such entity is
attributable to nonqualified financial property (as defined
in section 1397C(e)).
(B) Proprietorship
Such term shall include any business carried on by an
individual as a proprietor if such business would meet the
requirements of subparagraph (A) were it incorporated.
(C) Portions of business may be qualified active low-income
community business
The term ''qualified active low-income community business''
includes any trades or businesses which would qualify as a
qualified active low-income community business if such trades
or businesses were separately incorporated.
(3) Qualified business
For purposes of this subsection, the term ''qualified
business'' has the meaning given to such term by section
1397C(d); except that -
(A) in lieu of applying paragraph (2)(B) thereof, the rental
to others of real property located in any low-income community
shall be treated as a qualified business if there are
substantial improvements located on such property, and
(B) paragraph (3) thereof shall not apply.
(e) Low-income community
For purposes of this section -
(1) In general
The term ''low-income community'' means any population census
tract if -
(A) the poverty rate for such tract is at least 20 percent,
or
(B)(i) in the case of a tract not located within a
metropolitan area, the median family income for such tract does
not exceed 80 percent of statewide median family income, or
(ii) in the case of a tract located within a metropolitan
area, the median family income for such tract does not exceed
80 percent of the greater of statewide median family income or
the metropolitan area median family income.
Subparagraph (B) shall be applied using possessionwide median
family income in the case of census tracts located within a
possession of the United States.
(2) Targeted populations.--
Secretary shall prescribe regulations
under which 1 or more targeted populations (within the meaning
of section 103(20) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (12 U.S.C. 4702(20))) may be
treated as low-income communities. Such regulations shall
include procedures for determining which entities are qualified
active low-income community businesses with respect to such
populations.
(3) Areas not within census tracts
In the case of an area which is not tracted for population
census tracts, the equivalent county divisions (as defined by the
Bureau of the Census for purposes of defining poverty areas)
shall be used for purposes of determining poverty rates and
median family income.
(4) Tracts with low population.--A population census tract
with a population of less than 2,000 shall be treated as a low-
income community for purposes of this section if such tract--
(A) is within an empowerment zone the designation
of which is in effect under section 1391, and
(B) is contiguous to 1 or more low-income
communities (determined without regard to this
paragraph).
(5) Modification of income requirement for census tracts
within high migration rural counties.--
(A) In general.--In the case of a population
census tract located within a high migration rural
county, paragraph (1)(B)(i) shall be applied by
substituting `85 percent' for `80 percent'.
(B) High migration rural county.--For purposes of
this paragraph, the term `high migration rural county'
means any county which, during the 20-year period ending
with the year in which the most recent census was
conducted, has a net out-migration of inhabitants from
the county of at least 10 percent of the population of
the county at the beginning of such period.
(f) National limitation on amount of investments designated
(1) In general
There is a new markets tax credit limitation for each calendar
year. Such limitation is -
(A) $1,000,000,000 for 2001,
(B) $1,500,000,000 for 2002 and 2003,
(C) $2,000,000,000 for 2004 and 2005, and
(D) $3,500,000,000 for 2006, 2007, and 2008
(2) Allocation of limitation
The limitation under paragraph (1) shall be allocated by the
Secretary among qualified community development entities selected
by the Secretary. In making allocations under the preceding
sentence, the Secretary shall give priority to any entity -
(A) with a record of having successfully provided capital or
technical assistance to disadvantaged businesses or
communities, or
(B) which intends to satisfy the requirement under subsection
(b)(1)(B) by making qualified low-income community investments
in 1 or more businesses in which persons unrelated to such
entity (within the meaning of section 267(b) or 707(b)(1)) hold
the majority equity interest.
(3) Carryover of unused limitation
If the new markets tax credit limitation for any calendar year
exceeds the aggregate amount allocated under paragraph (2) for
such year, such limitation for the succeeding calendar year shall
be increased by the amount of such excess. No amount may be
carried under the preceding sentence to any calendar year after
2014.
(g) Recapture of credit in certain cases
(1) In general
If, at any time during the 7-year period beginning on the date
of the original issue of a qualified equity investment in a
qualified community development entity, there is a recapture
event with respect to such investment, then the tax imposed by
this chapter for the taxable year in which such event occurs
shall be increased by the credit recapture amount.
(2) Credit recapture amount
For purposes of paragraph (1), the credit recapture amount is
an amount equal to the sum of -
(A) the aggregate decrease in the credits allowed to the
taxpayer under section 38 for all prior taxable years which
would have resulted if no credit had been determined under this
section with respect to such investment, plus
(B) interest at the underpayment rate established under
section 6621 on the amount determined under subparagraph (A)
for each prior taxable year for the period beginning on the due
date for filing the return for the prior taxable year involved.
No deduction shall be allowed under this chapter for interest
described in subparagraph (B).
(3) Recapture event
For purposes of paragraph (1), there is a recapture event with
respect to an equity investment in a qualified community
development entity if -
(A) such entity ceases to be a qualified community
development entity,
(B) the proceeds of the investment cease to be used as
required of subsection (b)(1)(B), or
(C) such investment is redeemed by such entity.
(4) Special rules
(A) Tax benefit rule
The tax for the taxable year shall be increased under
paragraph (1) only with respect to credits allowed by reason of
this section which were used to reduce tax liability. In the
case of credits not so used to reduce tax liability, the
carryforwards and carrybacks under section 39 shall be
appropriately adjusted.
(B) No credits against tax
Any increase in tax under this subsection shall not be
treated as a tax imposed by this chapter for purposes of
determining the amount of any credit under this chapter or for
purposes of section 55.
(h) Basis reduction
The basis of any qualified equity investment shall be reduced by
the amount of any credit determined under this section with respect
to such investment. This subsection shall not apply for purposes
of sections 1202, 1400B, and 1400F.
(i) Regulations
The Secretary shall prescribe such regulations as may be
appropriate to carry out this section, including regulations -
(1) which limit the credit for investments which are directly
or indirectly subsidized by other Federal tax benefits (including
the credit under section 42 and the exclusion from gross income
under section 103),
(2) which prevent the abuse of the purposes of this section,
(3) which provide rules for determining whether the requirement
of subsection (b)(1)(B) is treated as met,
(4) which impose appropriate reporting requirements,
(5) which apply the provisions of this section to newly formed
entities, and
(6) which ensure that non-metropolitan counties receive a
proportional allocation of qualified equity investments.
Sources
(Added Pub. L. 106-554, Sec. 1(a)(7) (title I, Sec. 121(a)), Dec.
21, 2000, 114 Stat. 2763, 2763A-605.)
Miscellaneous
EFFECTIVE DATE
Section applicable to investments made after Dec. 31, 2000, see
Sec. 1(a)(7) (title I, Sec. 121(e)) of Pub. L. 106-554, set out as
a Effective Date of 2000 Amendment note under section 38 of this
title.
GUIDANCE ON ALLOCATION OF NATIONAL LIMITATION
AMENDMENTS
2006 - Tax Relief and Health Care Act of 2006 (P.L. 109-432)
SEC. 102. EXTENSION AND MODIFICATION OF NEW MARKETS TAX CREDIT.
(a) Extension.--Section 45D(f)(1)(D) <<NOTE: 26 USC 45D.>> is
amended by striking ``and 2007'' and inserting ``, 2007, and 2008''.
(b) Regulations Regarding Non-Metropolitan Counties.--Section 45D(i)
is amended by striking ``and'' at the end of paragraph (4), by striking
the period at the end of paragraph (5) and inserting ``, and'', and by
adding at the end the following new paragraph:
``(6) which ensure that non-metropolitan counties receive a
proportional allocation of qualified equity investments.''.
2004 - Subsec.223(a),Pub.L.108-357, amended Sec.45D by
adding a new paragraph (5). Effective Date:.--The amendment made
by this section shall take effect as if included in the amendment
made by section 121(a) of the Community Renewal Tax Relief
Act of 2000.
2004 - Subsec.221(b),Pub.L.108-357, amended 45(D)(e),
by adding paragraph (4). This amendment shall apply to
investments made after the date of the enactment of this
Act.
2004 - Subsec.221(a),Pub.L.108-357, amended 45D(e),
paragraph (2) to read: "(2) Targeted populations.--
The <<NOTE: Regulations.>> Secretary shall prescribe
regulations under which 1 or more targeted populations
(within the meaning of section 103(20) of the Riegle
Community Development and Regulatory Improvement Act of 1994
(12 U.S.C. 4702(20))) may be treated as low-income communities.
Such regulations shall include procedures for determining which
entities are qualified active low-income community businesses
with respect to such populations.
This amendment shall apply to designations made by the
Secretary of the Treasury after the date of the enactment
of this Act.
Pub. L. 106-554, Sec. 1(a)(7) (title I, Sec. 121(f)), Dec. 21,
2000, 114 Stat. 2763, 2763A-610, provided that: ''Not later than
120 days after the date of the enactment of this Act (Dec. 21,
2000), the Secretary of the Treasury or the Secretary's delegate
shall issue guidance which specifies -
''(1) how entities shall apply for an allocation under section
45D(f)(2) of the Internal Revenue Code of 1986, as added by this
section;
''(2) the competitive procedure through which such allocations
are made; and
''(3) the actions that such Secretary or delegate shall take to
ensure that such allocations are properly made to appropriate
entities.''
EFFECTIVE DATE OF 2006 AMENDMENT
2006 - Tax Relief and Health Care Act of 2006 (P.L. 109-432)
SEC. 102. EXTENSION AND MODIFICATION OF NEW MARKETS TAX CREDIT.
(c) <<NOTE: 26 USC 45D note.>> Effective Date.--The amendments made
by this section shall take effect on the date of the enactment of this
Act.
AUDIT AND REPORT
Pub. L. 106-554, Sec. 1(a)(7) (title I, Sec. 121(g)), Dec. 21,
2000, 114 Stat. 2763, 2763A-610, provided that: ''Not later than
January 31 of 2004, 2007, and 2010, the Comptroller General of the
United States shall, pursuant to an audit of the new markets tax
credit program established under section 45D of the Internal
Revenue Code of 1986 (as added by subsection (a)), report to
Congress on such program, including all qualified community
development entities that receive an allocation under the new
markets credit under such section.''
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 38, 39, 196 of this
title.
