The Treasury Department and the Internal Revenue Service have proposed a set of changes to the New Markets Tax Credit program to encourage more money to go toward non-real estate businesses located in low-income communities.

The changes are intended to foster greater investment in operating businesses rather than real estate businesses. The Treasury and the IRS said they are seeking public comments on the changes, along with other changes that would promote greater investment in operating businesses other than real estate.

The New Markets Tax Credit was created as part of the Community Renewal Tax Relief Act of 2000, and provides incentives to invest in businesses in designated low-income communities. However, the program has run into controversy in recent years, as some projects such as luxury hotels and antique car collections have been built using the credits (see Gaming the New Markets Tax Credit).

The Treasury and the IRS also filed a notice of proposed rulemaking last Friday, along with an advance notice of proposed rulemaking, which invites public comments and describes potential changes to the credit that might be made to facilitate more investment in non-real estate businesses. A notice of public hearing was also issued.

The proposed modifications to the credit are intended to promote greater investment in non-real estate businesses under the New Markets Tax Credit program while still maintaining the structure of the credit that has been successful for other types of investments.

Potential changes to the tax credit include revising reinvestment requirements for entities investing in operating businesses, streamlining compliance requirements, and modifying ownership rules to reduce noncompliance risk over the course of an investment, among others.
Groups and organizations representing investors, qualified community development entities, businesses, and other entities involved with the New Markets Tax Credit program have submitted comments to the Treasury and the IRS requesting additional guidance to encourage greater investment in non-real estate businesses. 

The commentators suggested that revising the New Markets Tax Credit program to encourage investment in non-real estate businesses would bring increased amounts of capital to underserved businesses in low-income communities. The Treasury Department believes that revisions to the regulations under the New Markets Tax Credit program would have a favorable effect on the ability of the program to benefit non-real estate businesses in low-income communities.

The New Markets Tax Credit has been a successful tool for encouraging private sector investments in low-income communities, the IRS and the Treasury Department noted.  According to the Treasury Department’s Community Development Financial Institutions Fund, through 2009, the New Markets Tax Credit has helped to spur $16 billion of investments in approximately 3,000 businesses and real estate projects located in low-income communities throughout the country, including investments in manufacturing businesses, alternative energy companies, charter schools, health care facilities, and job training centers. Although New Markets Tax Credit investments may be made in non-real estate businesses, the investments made to date have been predominantly in real estate projects.  Through 2009, only 35 percent of New Market Tax Credit dollars invested in qualified active low-income community businesses were invested in non-real estate businesses, and much of these investments supported real estate-related projects (for example, purchasing or renovations of owner-occupied facilities).