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Receive Significant Federal and Illinois Tax Credits for Helping Low-Income Communities

Would you like to receive significant federal and Illinois tax credits totaling up to 78% of your investment and get a return on that investment while helping low-income communities? Sound too good to be true? This actually can be accomplished with a federal and Illinois tax credit known as the New Markets Tax Credit (NMTC). The NMTC was previously only available to be claimed against federal tax, but effective December 31, 2008, Illinois enacted its own version of the NMTC.

Background

In an effort to increase investment in and promote the economic development of low-income communities, the federal government enacted the NMTC, which can be claimed against a taxpayer's federal income tax over a seven-year period. To qualify for the federal NMTC, investors must make a qualified equity investment into a federally approved community development entity (CDE). A CDE is an organization whose primary mission is servicing or providing investment capital for low-income communities or low-income persons and maintaining accountability to residents of low-income communities through representation on a governing board of or advisory board to the entity. A low-income community is generally a community that meets any of the following criteria: has a poverty rate of at least 20%; in a metropolitan area, the median family income is not more than 80% of the statewide median family income; or, if not located in a metropolitan area, the median family income is not more than 80% of the greater of the statewide median income or the metropolitan area median income.

CDEs also may make investments or loans in eligible projects located in these low-income communities. Because these projects lack credit history or necessary collateral, they generally would not qualify for development or expansion loans from large lending institutions.

Under the Illinois NMTC, certain investors may claim tax credits against their Illinois income, franchise or insurance premium tax liabilities. The requirements to qualify for the Illinois NMTC are similar to the federal NMTC with the additional requirement that the low-income communities must be located in Illinois.

How are the federal and Illinois NMTC computed?

Both the federal and Illinois NMTC may be claimed over a seven-year period and each may total up to 39% of the qualified equity investments made into a federally approved CDE. Generally, for federal purposes, the investor may claim a credit equal to 5% of the investment in years one through three and 6% in years four through seven. For Illinois purposes, the investor generally may not claim any credit for the first two years but may claim 7% of the investment in the third year and 8% in years four through seven. Further, the investor may receive a return on their qualified equity investment in the CDE.

For example, an investor makes a $1,000,000 investment in a federally approved CDE in return for an equity stake in the CDE and also receives federal and Illinois NMTC. For federal purposes, the investor may claim a $50,000 (5% x $1,000,000) tax credit annually in years one through three and a $60,000 (6% x $1,000,000) tax credit annually in years four through seven against their federal income tax. The total federal tax credit value to the investor over seven years is $390,000, or 39%.

For Illinois purposes, the investor may not claim the Illinois NMTC in years one and two. In year three, the investor may claim a $70,000 (7% x $1,000,000) tax credit against their Illinois income, franchise or insurance premium taxes. In years four through seven, the investor may claim an $80,000 (8% x $1,000,000) tax credit annually against their Illinois income, franchise or insurance premium taxes. The total Illinois tax credit value to the investor over seven years is $390,000, or 39%.

Where the amount of the federal NMTC is calculated it becomes part of a taxpayer's general business credit. General business credits may be used to offset a person's regular tax liability. Most general business credits are not allowed for the reduction a taxpayer's alternative minimum tax—NMTC has this limitation. Consequently, the credit may only be used to reduce regular tax down to the alternative minimum tax. Tax rules specify that the amount of credit utilized may be the amount needed to reduce a regular tax to the amount of the alternative minimum tax. Any unused credit may be carried back one year and carried forward 20 years.

	Federal	Illinois	Total
Year 1	$50,000	$0	$50,000
Year 2	$50,000	$0	$50,000
Year 3	$50,000	$70,000	$120,000
Year 4	$60,000	$80,000	$140,000
Year 5	$60,000	$80,000	$140,000
Year 6	$60,000	$80,000	$140,000
Year 7	$60,000	$80,000	$140,000
Total	$390,000	$390,000	$780,000

Recapture of the NMTC

Generally, the federal and Illinois NMTC are subject to recapture if, within the seven-year period, any of the following events occur:

• The entity ceases to be a qualified CDE;
• Substantially all of the proceeds of the investment cease to be used to make qualified low-income community investments; or
• The investment is redeemed or otherwise cashed out by the entity

Transferability of the NMTC

The Illinois NMTC is not refundable or salable on the open market. This tax credit earned by any "pass-through" entity (i.e., partnerships, S corporations, etc.) may be allocated to the partners/shareholders of that entity for their direct use. Any unused credit may be carried forward for five subsequent taxable years.

Available CDE investment opportunities

According to the United States Department of the Treasury, the following are some of 2008 federally approved CDEs that serve Illinois low-income communities and their respective total NMTC available to investors:

• Citibank NMTC Corporation $31.25 million
• Community Reinvestment Fund New Markets I, LP $6.25 million
• HEDC New Markets, Inc. $90 million
• Local Initiatives Support Corporation $80 million
• National New Markets Tax Credit Fund, Inc. $110 million
• USBCDE, LLC $80 million

Who is eligible to receive the federal and Illinois NMTC?

While anyone with federal and Illinois income, franchise or insurance premium tax liabilities may invest in a CDE and receive the federal and Illinois NMTC, the credit is primarily designed for investors such as banks, insurers and investment funds with substantial tax liabilities.

Questions about the NMTC?
Deciding whether or not to invest in a CDE is not an easy decision, especially in light of today's economy. To obtain more information, please contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or your Blackman Kallick representative.Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.