New Markets Tax Credits can fill the gap in your capital campaign caused by COVID-19

The COVID-19 pandemic has presented new challenges for nonprofit organizations. Major fundraisers have been postponed or canceled because of limitations on social gatherings, making it especially difficult to raise money. As a result, nonprofits have had to find creative ways to meet their fundraising goals or delay planned projects.

To help fill the gap left by shortfalls in fundraising from traditional sources, nonprofit organizations can explore the New Markets Tax Credit (NMTC) program. In December 2019, the NMTC program was extended for an additional year and increased from $3.5 to $5 billion, but the current round of awards, which are expected to be announced in early summer, are still limited to $3.5 billion in allocation.

Overview of the NMTC program

In a nutshell, the NMTC program encourages taxpayers to make investments into low-income communities by providing them with a tax credit for making those investments. The majority of urban areas and many rural areas qualify as distressed under the NMTC program. The credit equals 39% of the investment, earned over seven years. NMTCs can provide a permanent net subsidy to a qualifying nonprofit organization that receives such an investment of up to 15 to 20% of the budgeted amount of their capital project. The best candidates are nonprofit organizations that are:

• Located in or serve the residents of a distressed or low-income community.
• Seeking financing of $7 million or more.
• Either or both of the following:
  • Making services or goods available to residents of a distressed community that aren’t readily available in the community.
  • Creating a significant number of permanent jobs, particularly if such jobs will be available to low-income individuals.

NMTCs can provide a permanent net subsidy to a qualifying nonprofit organization that receives such an investment of up to 15 to 20% of the budgeted amount of their capital project.

Can your nonprofit organization benefit from NMTCs?

There’s no restriction on what type of nonprofit organization can utilize NMTCs — as long as they meet the NMTC eligibility requirements, which are based on census tract data, such as the poverty rate and median income. We’ve helped a variety of nonprofit organizations take advantage of the NMTC program. Examples include:

• Business incubators
• Healthcare facilities
• Human service agencies
• Community facilities
• Charter schools
• College & university facilities
• Community theaters

How to access NMTC capital

Nonprofit organizations seeking NMTC subsidies should first make sure their project qualifies and then identify community development entities (CDEs) with an allocation of NMTCs that are interested in utilizing part of such allocation to benefit the project. We can quickly determine if your project is eligible for NMTCs if you provide us with its location. We can also help introduce you to CDEs that may be able to provide NMTC allocation to your project. Information regarding CDEs that have received NMTCs is available here.

In addition, the structure of the transaction and the nonprofit organization’s potential role in the project should be reviewed to determine consistency with the organization’s mission and to minimize potential tax consequences, including unrelated business income taxes, property taxes, and sales/use taxes. The organization may need to form a new entity to accommodate the NMTC structure. Therefore, it will be important for the nonprofit to organize a team of experienced professionals to avoid foot faults and maximize the potential benefits associated with NMTCs.

If you have any questions or if you’re planning a project that could benefit from an NMTC subsidy, please give us a call. We know how to help.