Businesses in economically distressed communities often struggle to secure the capital they need for expansion, equipment, facilities, and other growth investments. The New Markets Tax Credit (NMTC) was designed to change that by incentivizing private investment in underserved areas through federal income tax credits for qualifying investors.
Previously set to expire on December 31, 2025, the NMTC was made permanent under the One Big Beautiful Bill Act. Here is what your small business needs to know about this powerful — but complex — tax incentive.
WHAT IS THE NEW MARKETS TAX CREDIT?
The NMTC encourages individuals and businesses to invest in Community Development Entities (CDEs). A CDE is typically a domestic corporation or partnership whose primary mission is serving low-income communities or channeling investment capital into them. To participate, a CDE must be certified by the U.S. Department of the Treasury’s Community Development Financial Institutions Fund.
Once certified, the CDE raises capital from investors and directs those funds toward qualifying loans, equity investments, and other approved activities in low-income communities. Depending on your role in the transaction, the benefits can take two forms: a direct federal tax credit if you invest in a CDE, or improved financing access if your business receives capital from one.
THE NMTC IS NOW PERMANENT
Congress originally authorized the NMTC on a temporary basis, with the latest extension set to sunset after December 31, 2025. The One Big Beautiful Bill Act removed that expiration date, making the credit a permanent part of the tax code. That long-term certainty gives investors and community developers the stability needed to plan multi-year projects with confidence.
HOW THE TAX CREDIT WORKS FOR INVESTORS
If your business or investment portfolio includes a stake in a certified CDE, the NMTC can deliver substantial federal tax savings.
The 39% Credit Breakdown
The credit equals 39% of your qualified equity investment in the CDE, claimed gradually over seven years:
- 5% of the investment in each of the first three years
- 6% in each of the next four years
For example, a qualifying $1 million equity investment could generate $390,000 in federal tax credits over the seven-year period, subject to applicable limitations.
Investment Requirements and Compliance
To claim the credit, you must make a cash investment that the CDE formally designates as a qualified equity investment. The CDE must then deploy “substantially all” of those funds into qualified low-income community investments (QLICIs). Generally, this means the CDE must invest at least 85% of its aggregate gross assets in QLICIs — though that threshold drops to 75% during the seventh year.
Tax Forms and Basis Adjustments
The credit is calculated on Form 8874, “New Markets Credit,” and reported as part of the general business credit on Form 3800.
Be aware that claiming the NMTC reduces your tax basis in the investment, which can affect your tax liability if you later sell your stake. Additionally, if the CDE fails to meet program requirements or redeems your investment during the seven-year credit period, previously claimed credits may be recaptured — with interest.
FINANCING BENEFITS FOR SMALL BUSINESSES
For many small business owners, the most practical benefit of the NMTC program is not the tax credit itself, but the financing it unlocks. By attracting private capital into CDEs, the program expands the pool of available funding for businesses and nonprofits operating in low-income communities.
What Types of Projects Qualify?
NMTC-supported financing has backed a wide range of businesses and projects, including:
- Real estate developments
- Manufacturing facilities
- Retail operations
- Health care providers
- Child care centers and schools
- Hotels and hospitality ventures
- Community centers
A Real-World Example
Imagine you own a grocery store in a qualifying low-income community and need funding to renovate your building. A certified CDE could use capital raised from NMTC investors to provide your business with a loan or equity financing for the renovation. In this arrangement, the investors receive the federal tax credits over seven years, while your business gains access to capital that might be unavailable through traditional banks.
IMPORTANT CAVEATS TO KEEP IN MIND
Simply operating in a low-income area does not automatically qualify your business or project for NMTC-backed financing. The CDE itself must evaluate whether your business, its location, and the planned use of funds satisfy the program’s strict requirements. Eligibility depends on more than geography — it requires a deliberate alignment with the CDE’s mission and the Treasury’s guidelines.
IS THE NMTC RIGHT FOR YOU?
With its newly permanent status, the New Markets Tax Credit offers a compelling opportunity for qualified investors seeking federal tax relief and for businesses in underserved communities looking for growth capital. But the rules are intricate, and the compliance burden is real.
Contact us to explore whether the NMTC fits your investment strategy or financing needs. We can help you estimate the potential tax benefits, evaluate qualification requirements, and navigate the compliance landscape.