Internal Revenue Code:Sec. 45D. New markets tax credit

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Contents


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.
 

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