Finance term
New Markets Tax Credit (NMTC)
Also known as: NMTC, New Markets Tax Credit, IRC Section 45D, community development tax credit
Definition
The New Markets Tax Credit (NMTC) program provides a 39% federal tax credit over 7 years to investors who make qualified equity investments in Community Development Entities (CDEs), which then deploy capital into low-income businesses and real estate projects. Authorized under IRC Section 45D, the program is administered by the CDFI Fund at Treasury. See cdfifund.gov and irs.gov/credits-deductions/businesses/new-markets-tax-credit.
Detailed explanation
The NMTC program was established by the Community Renewal Tax Relief Act of 2000 (P.L. 106-554), codified at IRC Section 45D. Congress allocates NMTC authority annually ($5 billion/year as of recent allocations); CDEs apply to the CDFI Fund for allocation awards through a competitive process. CDEs — typically CDFIs, banks, or community development organizations certified by the CDFI Fund — then raise NMTC investor equity and deploy it into Qualified Low-Income Community Investments (QLICIs).
How the credit works: An investor makes a Qualified Equity Investment (QEI) into a CDE. The investor receives a tax credit equal to 5% of the QEI in each of the first three years (total 15%) and 6% in each of the following four years (total 24%), for a combined 39% federal tax credit over 7 years. The QEI must remain invested for the full 7-year compliance period; early exit triggers credit recapture.
Eligible uses: QLICIs must be deployed into businesses or real estate projects in Low-Income Communities (LICs) — census tracts with poverty rates ≥ 20% or median family income ≤ 80% of the area median. Eligible businesses must not be in excluded categories (golf courses, racetracks, country clubs, massage parlors, casinos, and certain other businesses defined in IRC Section 45D(d)(3)).
For business owners located in or near low-income census tracts, NMTC financing can provide below-market-rate capital — the 39% subsidy allows CDEs to offer lower interest rates, longer terms, or interest-only periods compared to conventional financing. Total project sizes financed with NMTC typically start at $3M–$5M given transaction costs. See cdfifund.gov for the NMTC program allocation map and list of certified CDEs.
◈ Worked example
- NMTC structure: A manufacturing company in a low-income census tract needs $10M for expansion. A CDE raises $7M in NMTC investor equity + structures $10M QLICI loan to the business. The investor receives 39% × $7M = $2.73M in federal tax credits over 7 years. The CDE passes the subsidy to the borrower as a 3% interest rate vs. the 7% market rate — saving $400K/year.
- Real estate: A healthcare clinic project in a distressed neighborhood uses $15M NMTC financing. NMTC investor equity enables below-market financing for a project that would not pencil at conventional rates. Project creates 120 permanent jobs and serves 10,000 low-income patients annually.
- NMTC allocation: The CDFI Fund received 200+ applications for its most recent $5B allocation round, awarding to 100 CDEs. Demand consistently exceeds supply — CDEs compete on deployment track record, community impact metrics, and targeted distress levels.
Common questions
The most-asked questions about New Markets Tax Credit (NMTC) — answered straightforwardly.
Can my business apply directly for NMTC financing? +
No — businesses cannot apply to the CDFI Fund directly. NMTC financing flows through CDEs (certified intermediaries). Businesses seeking NMTC capital must connect with a CDE that has available NMTC allocation and is actively deploying into their geography and sector. The CDFI Fund's website (cdfifund.gov) maintains a list of CDEs and their deployment focus.
What is the minimum project size for NMTC financing? +
NMTC transactions typically have minimum sizes of $3M–$5M in total project costs due to transaction costs (legal, accounting, and structuring fees that can reach $300K–$500K per deal). Smaller deals are generally not cost-effective unless a CDE uses aggregated NMTC structures (pooling multiple smaller businesses into a single allocation deployment).
How do I know if my business is in a qualifying low-income community? +
The CDFI Fund provides an online mapping tool at cims.cdfifund.gov that identifies NMTC-eligible census tracts. LICs are defined as census tracts with poverty rates ≥ 20% or median family income ≤ 80% of the statewide or metropolitan area median. The NMTC program also includes a 'targeted distress' category for the most severely distressed tracts that receives extra credit in the CDE application process.
Further reading
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