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An introduction to the

An introduction to the. New Markets Tax Credit. Brad Elphick, CPA Novogradac & Company. brad.elphick@novoco.com. Outline. Outline/Agenda. Background and purpose of NMTC program The basic NMTC structure Claiming the credits Tax credit pool, application process and award process

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An introduction to the

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  1. An introduction to the New Markets Tax Credit

  2. Brad Elphick, CPA Novogradac & Company brad.elphick@novoco.com

  3. Outline Outline/Agenda • Background and purpose of NMTC program • The basic NMTC structure • Claiming the credits • Tax credit pool, application process and award process • The leveraged structure • Avoiding credit recapture

  4. Business $ $ $ $ Section 45D ‘00 Credits IRC ? Tax Liability Investor(s) ROI “New Markets Tax Credit” $ $ or Low-Income Community Thriving Community

  5. Program Definition Community Development Entitiesmust use… Substantially All of the proceeds from… Qualified Equity Investmentsto make… Qualified Low-Income Community Investmentsin… Qualified Active Low-Income Community Businesseslocated in… Low-Income Communities.

  6. Business $ $ $ $ Year 1 $500k Year 2 $500k Year 3 $500k Year 4 $600k NMTCAllocation Application AllocationAgreement CDEApplication Application Year 5 $600k Year 6 $600k Year 7 $600k Tax Liability Investor(s) CDFI Fund Total $3.9mil • 2011 Application: • 75 pages • 47 questions Business Strategy Community Impact Management Capacity Capitalization Strategy Info Re: Previous Awards • Community centers • Libraries • Health care facilities • Boys and girls clubs • Charter schools • Museums • Grocery stores • Drug rehab facilities $10Mil x 39% $3.9 Mil = $3.5 Bil • Community centers • Libraries • Health care facilities • Boys and girls clubs • Charter schools • Museums • Grocery stores • Drug rehab facilities NMTCs QEIs “Qualified Equity Investments” • Corporations • Partnerships • LLCs taxed as corporations or partnerships Investment Authority CDE 39% “Community Development Entity” Examples of QALICBs might include but are not limited to: Examples of QALICBs might include but are not limited to: 85% $10 M $1.365 Bil $ = “Substantially All” of $3.9 Mil NMTCs “Qualified Low-Income Community Investments” QLICIs “Qualified Active Low-Income Community Businesses” QALICBs Low-Income Communities “ ”

  7. Program Definition CDEsmust use… SubAll of the proceeds from… QEIsto make… QLICIsin… QALICBslocated in… LICs.

  8. $ $ $ $ Tax Liability Investor(s) CDFI Fund $10Mil x 39% $3.9 Mil = • Community centers • Libraries • Health care facilities • Boys and girls clubs • Museums • Drug rehab facilities $3.5 Bil QEIs NMTCs QEIs Investment Authority CDE CDE 39% Examples of QALICBs might include but are not limited to: 85% $10 M $1.365 Bil $ “Substantially All” of = “Substantially All” of $3.9 Mil NMTCs QLICIs QLICIs QALICBs QALICBs “Low-Income Communities” “Low-Income Communities”

  9. $ $ $ $ Tax Liability Investor(s) CDFI Fund $10Mil x 39% $3.9 Mil = • Community centers • Libraries • Health care facilities • Boys and girls clubs • Museums • Drug rehab facilities $3.5 Bil NMTCs QEIs Investment Authority CDE 39% Examples of QALICBs might include but are not limited to: 85% $10 M $1.365 Bil $ = “Substantially All” of $3.9 Mil NMTCs QLICIs QALICBs “Low-Income Communities”

  10. RECAPTURE $ $ $ 100%RECAPTURE Tax Liability Investor(s) CDFI Fund $10Mil x 39% $3.9 Mil = $3.5 Bil NMTCs QEIs Investment Authority CDE 39% 85% $10 M $1.365 Bil $ = “Substantially All” of $3.9 Mil NMTCs QLICIs QALICBs “Low-Income Communities”

  11. $ $ $ Credit Recapture Year 1 5% IRC § 45D(g)(3) Year 2 5% Year 3 5% 100%RECAPTURE Year 4 6% Year 5 6% Year 6 6% Recapture can happen if… Year 7 6% Investor(s) Total 39% 1. 2. 3. CDE ceases to be a qualified CDE $10Mil QEIs CDE 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  12. $ $ $ Credit Recapture IRC § 45D(g)(3) 100%RECAPTURE Recapture can happen if… Investor(s) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test $10Mil QEIs CDE < 85% 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  13. $ $ $ Credit Recapture IRC § 45D(g)(3) 100%RECAPTURE Recapture can happen if… Investor(s) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE * $ $10Mil QEIs CDE 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  14. $ $ $ Credit Recapture IRC § 45D(g)(3) Investor(s) $10Mil QEIs Recapture CDE 85% $ = “Substantially All” of QLICIs QALICBs Bankruptcy “Low-Income Communities”

  15. $ $ $ Credit Recapture IRC § 45D(g)(3) How about the foreclosure of the mortgage on a commercial rental real estate QALICB? Investor(s) $10Mil QEIs Recapture CDE 85% $ = “Substantially All” of QLICIs FORECLOSURE QALICBs “Low-Income Communities”

  16. $ $ $ Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE 100%RECAPTURE Recapture can happen if… Investor(s) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE $10Mil QEIs CDE 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  17. Business Business $ $ $ Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE Investor(s) QLICI Reinvestment $10Mil QEIs CDE “Sub All” 85% $ = “Substantially All” of 70% 90% $9Mil $7Mil $2Mil $2Mil QLICI QLICIs QLICI QALICBs “Low-Income Communities” QALICB QALICB 100%RECAPTURE

  18. Business Business Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE QALICB QALICB 100%RECAPTURE

  19. Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE ≥85% ≥85% ≥85% ≥85% ≥85% ≥85% ≥75% ≥85% ≥85% 84.99% ≥85% ≥85% ≥85% ≥85% 84.99% ! 100%RECAPTURE !

  20. Business Business Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE QALICB QALICB 100%RECAPTURE

  21. Business Business $ $ $ Credit Recapture Recapture can happen if… IRC § 45D(g)(3) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE 100%RECAPTURE Investor(s) * $ > $250k ≤ $250k $ Recapture event? QEIs Y__ N__ CDE $250k Operating Income $ QLICI QLICIs QALICB “Low-Income Communities” QALICB QALICB 100%RECAPTURE

  22. $ $ $ Credit Recapture IRC § 45D(g)(3) 100%RECAPTURE Recapture can happen if… Investor(s) 1. 2. 3. CDE ceases to be a qualified CDE Failed “Sub All” test Equity investment redeemed or cashed out by CDE $10Mil QEIs CDE 85% $ = “Substantially All” of QLICIs QALICBs “Low-Income Communities”

  23. $ $ $ $ The Leveraged Structure ? $0.68 – $0.72 $7.2 – 7.4 Mil $2.6 – 2.8 Mil Loan Equity $2.56 Lender(s) Investor(s) ROI $ $3.9 Mil $10Mil Interest x 39% $3.9 Mil = NMTCs • Community centers • Libraries • Health care facilities • Boys and girls clubs • Museums • Drug rehab facilities NMTCs QEIs $10Mil CDE Fund QEIs $ Distribution Examples of QALICBs might include but are not limited to: $ $ Interest ?

  24. Learning journey “Nonqualified financial property” “Portion of a business” “Direct tracing method” “Targeted populations” “Reasonable expectation” “Springing control” “Sin business” “Sub-all” “Reinvestmentrequirement” ? ? ? ? ? ?

  25. Intro slide Novogradac Search iTunes Brad Elphick, CPA brad.elphick@novoco.com

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