You can claim a tax credit for a qualified equity investment in a
qualified community development entity made after December 31, 2000.
This is called the new markets credit.
Amount of credit.
You claim the credit over a period of up to 7 years. To find the
amount of your credit each year, multiply the amount you paid the
qualified community development entity for your investment by a
percentage. The percentage is:
- 5% for the year the investment is made and each of the next
2 years, and
- 6% for each of the next 4 years.
Thus the credit totals 39% of your investment over a 7-year
To claim the credit for a year, you must hold the qualified equity
investment on the credit allowance date for that year. The credit
allowance date is the date you make the initial investment and each of
the next 6 anniversary dates.
Qualified equity investment.
Generally, this is the cost of any stock in a corporation or any
capital interest in a partnership if the following requirements are
- The corporation or partnership is a qualified community
development entity (defined next).
- You acquire the investment on the original issue date for
- Substantially all of the cash is used to make qualified
low-income community investments (defined later), or at least 85% of
the entity's total gross assets are in qualified low-income community
- The qualified community development entity designates the
investment for purposes of the new markets credit.
Qualified community development entity.
This is any U.S. corporation or partnership that meets the
- Its primary mission is serving, or providing investment
capital for, low-income communities or persons.
- It maintains accountability to residents of low-income
communities through their representation on any governing or advisory
boards of the entity.
- It is certified by the Secretary of the Treasury as a
qualified community development entity.
Qualified low-income community investment.
This means one of the following.
- Any capital or equity investment in, or loan to, any
qualified active low-income community business (defined next).
- The purchase from another qualified community development
entity of any loan made by that entity that is a qualified low-income
- Financial counseling and other services specified in
regulations to businesses located in, and residents of, low-income
- Any equity investment in, or loan to, any qualified
community development entity.
Qualified active low-income community business.
This is any corporation (including a nonprofit corporation),
partnership, or sole proprietorship, if all the following statements
are true for the tax year.
- At least 50% of its total gross income is from the active
conduct of a qualified business (defined next) within a low-income
- A substantial part of the use of its tangible property
(whether owned or leased) is within a low-income community.
- A substantial part of the employees' services are performed
in a low-income community.
- Less than 5% of the average of the total unadjusted bases of
the property of the business is from:
- Nonqualified financial property (generally, debt, stock,
partnership interests, options, futures contracts, forward contracts,
warrants, notional principal contracts, and annuities), or
- Collectibles not held primarily for sale to
Also, a business that would qualify if it were separately
incorporated is treated as a qualified active low-income community
This is generally any trade or business except one that consists
primarily of developing or holding intangibles for sale or license.
However, the rental to others of real property located in a low-income
community is a qualified business only if there are substantial
improvements located on the property. Also, a qualified business does
not include any business listed earlier in item (5) or item (6) under
Nonqualified employees in the Empowerment Zone
Employment Credit section.
A low-income community generally means any population census tract
if any of the following apply.
- The poverty rate is at least 20%.
- If the tract is not located within a metropolitan area, the
median family income is not more than 80% of statewide median family
- If the tract is located within a metropolitan area, the
median family income is not more than 80% of the greater of the
statewide median family income or the metropolitan area median family
The credit is recaptured if, within the 7-year credit period, the
community development entity is no longer qualified, substantially all
of the proceeds of the investment are no longer used for a qualifying
purpose, or the investment is redeemed.
For more information about the new markets credit, see section 45D
of the Internal Revenue Code.