An introduction to Fair Trade An introduction to Fair Trade.
An introduction to the
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An introduction to the New Markets Tax Credi
description
An introduction to the. New Markets Tax Credit. Brad Elphick, CPA Novogradac & Company. [email protected]. Outline. Outline/Agenda. Background and purpose of NMTC program The basic NMTC structure Claiming the credits Tax credit pool, application process and award process - PowerPoint PPT Presentation
Transcript of An introduction to the
An introduction to the
New Markets Tax Credit
Outline• 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
Thriving Community
orLow-Income Community
Tax Liability
$
ROICredits
$IRC Section 45D
“New Markets Tax Credit”
Investor(s)
‘00
Program DefinitionCommunity Development Entities must use…
Substantially All of the proceeds from…
Qualified Equity Investments to make…
Qualified Low-Income Community Investments in…
Qualified Active Low-Income Community Businesses located in…
Low-Income Communities.
39%
NMTCs“Qualified Equity Investments”
“Qualified Low-Income Community Investments”
Low-Income Communities
$10 Mil
Investor(s)
CDE
CDFIFund
CDEApplicationNMTC
AllocationApplication
$10 M
Investment Authority
$
$3.5 Bil
“Qualified Active Low-Income Community Businesses”
Tax Liability
QLICIs
Application
NMTCs
• Corporations• Partnerships• LLCs taxed as corporations or partnerships
“Community Development Entity”
QEIs
I. Business StrategyII. Community ImpactIII. Management CapacityIV. Capitalization StrategyV. Info Re: Previous Awards
$3.9 Mil$1.365 Bil
x 39% $3.9 Mil=
Year 1Year 2
Year 3
$500k$500k
$500k
Year 4
Year 5Year 6
Year 7
$600k
$600k$600k
$600kTotal $3.9 mil
“Substantially All”of =
“ ”
AllocationAgreement
QALICBs
85%
2011 Application:• 75 pages• 47 questions
Examples of QALICBs might include but are not limited to:• Community centers• Libraries• Health care facilities• Boys and girls clubs• Charter schools• Museums• Grocery stores• Drug rehab facilities
Examples of QALICBs might include but are not limited to:• Community centers• Libraries• Health care facilities• Boys and girls clubs• Charter schools• Museums• Grocery stores• Drug rehab facilities
Program DefinitionCDEs must use…
Sub All of the proceeds from…
QEIs to make…
QLICIs in…
QALICBs located in…
LICs.
NMTCs
85%
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
CDFIFund
Investment Authority
$
QALICBs
Tax Liability
QLICIsNMTCs
39%
QEIs
$1.365 Bil
x 39% $3.9 Mil=
“Substantially All”of =
$3.9 Mil
$10 M
$3.5 Bil
CDE
“Substantially All”of
QEIs
QLICIs
QALICBs
“Low-Income Communities”
NMTCs
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
CDFIFund
Investment Authority
$
QALICBs
Tax Liability
QLICIsNMTCs
39%
QEIs
$1.365 Bil
x 39% $3.9 Mil=
“Substantially All”of =
$3.9 Mil
$10 M
$3.5 Bil
85%
NMTCs
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
CDFIFund
Investment Authority
$
QALICBs
Tax Liability
QLICIsNMTCs
39%
QEIs
$1.365 Bil
x 39% $3.9 Mil=
“Substantially All”of =
$3.9 Mil
$10 M
$3.5 Bil
85%
100% RECAPTURE
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
$
QALICBs
QLICIs
QEIs
“Substantially All”of =85%
IRC § 45D(g)(3)Credit Recapture
1.
2.
3.
CDE ceases to be a qualified CDE
Recapture can happen if…
100% RECAPTURE
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
QALICBs
IRC § 45D(g)(3)Credit Recapture
1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Recapture can happen if…
85%< 85%
QLICIs
QEIs
“Substantially All”of $ =
100% RECAPTURE
“Low-Income Communities”
$
QALICBs
QLICIs“Substantially All”of =
85%
IRC § 45D(g)(3)Credit Recapture
$10 Mil
Investor(s)
CDE
QEIs$*1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Equity investment redeemed or cashed out by CDE
Recapture can happen if…
100% RECAPTURE
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
$
QALICBs
QLICIs
QEIs
“Substantially All”of =85%
IRC § 45D(g)(3)Credit Recapture
Bankruptcy
Recapture
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
$
QALICBs
QLICIs
QEIs
“Substantially All”of =85%
IRC § 45D(g)(3)Credit Recapture
Recapture
How about the foreclosure of the mortgage on a commercial rental real
estate QALICB?
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
$
QALICBs
QLICIs
QEIs
“Substantially All”of =85%
IRC § 45D(g)(3)Credit Recapture
1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Equity investment redeemed or cashed out by CDE
Recapture can happen if…
100% RECAPTURE
1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Equity investment redeemed or cashed out by CDE
Recapture can happen if…
“Substantially All”of =85%
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
$
QEIs
IRC § 45D(g)(3)Credit Recapture
1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Equity investment redeemed or cashed out by CDE
Recapture can happen if…
QLICI Reinvestment
$9 MilQLICI
$2 Mil $7 Mil$2 MilQLICI QLICIs
QALICBs
“Sub All”
90%70%
IRC § 45D(g)(3)Credit Recapture
1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Equity investment redeemed or cashed out by CDE
Recapture can happen if…
≥85%≥85%≥85%≥85%≥85%≥85%≥75%
≥85%≥85%
84.99%
≥85%≥85%≥85%≥85%
84.99%
!!
IRC § 45D(g)(3)Credit Recapture
1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Equity investment redeemed or cashed out by CDE
Recapture can happen if…
100% RECAPTURE
IRC § 45D(g)(3)Credit Recapture
1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Equity investment redeemed or cashed out by CDE
Recapture can happen if…
“Low-Income Communities”
Investor(s)
CDE
$
QALICB
QLICIs
QEIs
IRC § 45D(g)(3)Credit Recapture
1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Equity investment redeemed or cashed out by CDE
Recapture can happen if…
QLICI
$ $
Operating Income$250 k
Recapture event?
Y__ N__> $250 k≤ $250 k
100% RECAPTURE
*
“Low-Income Communities”
$10 Mil
Investor(s)
CDE
QALICBs
IRC § 45D(g)(3)Credit Recapture
100% RECAPTURE
85%
QLICIs
QEIs
“Substantially All”of $ =
1.
2.
3.
CDE ceases to be a qualified CDE
Failed “Sub All” test
Equity investment redeemed or cashed out by CDE
Recapture can happen if…
NMTCs$10 Mil
Investor(s)
CDE
$
QEIsx 39% $3.9 Mil=
$2.56$7.2 – 7.4 Mil $2.6 – 2.8 Mil
Fund
Lender(s)
$10 MilQEIs
ROI
Loan Equity
The Leveraged Structure
NMTCs$3.9 Mil
$0.68 – $0.72
$Interest
$Distribution
$Interest
“Reasonable expectation”
“Sin business”
“Direct tracing method”
“Springing control”
“Targeted populations”
“Sub-all”
“Portion of a business”
“Reinvestmentrequirement”
“Nonqualified financial property”
? ? ???
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