This article is reprinted with the permission of Nixon Peabody LLP
In addition to the usual rules defining “low income communities” where projects are eligible for the new markets tax credit, the Code provides that certain individuals or groups of individuals who are low income or lack access to loans or equity investments, may qualify as a “targeted population” that is also eligible. The IRS first provided guidance, describing how an entity serving certain targeted populations could meet the requirements to be a qualified active low-income community business (or QALICB), in Notice 2006-60, and then, proposed regulations were published in September, 2008. Under those rules, a QALICB could rely on the Notice until the regulations became “final.”
Now, more than three years later, final regulations for targeted populations have been published. The IRS received many comments with respect to the proposed regulations to expand and clarify the rules. However, with few exceptions, the final regulations adopt the guidance from the Notice and the proposed regulations. The final regulations are effective December 5, 2011. Taxpayers may apply these new rules to taxable years ending before December 5, 2011 for targeted populations designated as eligible low-income communities by Treasury after October 22, 2004. Thereafter, Notice 2006-60 is obsolete and QALICBs must use the new final regulations.
As you may recall, an entity qualifies as a QALICB serving targeted populations if at least 50% of its gross income is “derived from” sales, rentals, services, or other transactions with low-income persons, at least 50% of its ownership is by low-income persons, or at least 40% of its employees are low-income persons. Such a QALICB could not be located in a census tract that exceeds 120% of the area median family income. A targeted population also includes individuals displaced by Hurricane Katrina.
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The administration is proposing to relax reinvestment requirements for community development entities:
Treasury Department to Simplify Rules for $5 Billion in Tax Credits for Private Investment in Lower-Income Communities: The Treasury Department is working on a set of regulatory reforms to the existing New Markets Tax Credit, which the Administration is proposing to expand from $3.5 billion to $5 billion in its FY2012 budget proposal. These reforms will make it easier for community development entities to attract private-sector funds for investment in startups and small businesses operating in lower-income communities. The reforms, which are expected to go into effect later this year, will relax the reinvestment requirements for community development entities investing in certain operating businesses.
See also: New Market Tax Credits fund luxury projects
An article in the March edition of Bloomberg Markets Magazine details how funds intended to help low-income communities often end up financing high-end projects
The article focuses on the opulent Blackstone Hotel in downtown Chicago, which recently re-opened after a $116 million renovation, subsidized by New Market Tax Credits. According to Bloomberg, Prudential Financial Inc. received $15.6 million in tax credits from the U.S. Department of the Treasury for funding the project and J.P. Morgan Chase received credits for providing loans and oversight to the deal.
The project spotlights a loophole in the NMTC program that savvy investors have been quick to exploit. The credits are only awarded to census tracts with a 20 poverty rate or with populations at 20% less than the median family income of the surrounding metropolitan area. The Blackstone project is located in an area that qualifies for credits with an individual poverty rate of 2%6 (according to the 2000 census). However, according to the article, “The poverty profile reflects the large number of students who attend two schools — Columbia College Chicago and Roosevelt University — in the area.” Among families, the article continues, “the poverty rate is just 3.9 percent.”
The divergence between individual and family poverty rates is not currently accounted for by the program’s guidelines, which leaves tax payers footing the bill for projects in affluent areas:
The program’s standards open up some of the nation’s wealthiest areas to development, according to Treasury records. Taxpayers have subsidized projects in tracts with median family incomes as high as $200,000, records show.
A total of $7.4 billion of the $16 billion already spent under New Markets, or 46 percent, has gone to tracts with family poverty levels ranging from zero to 19 percent, Treasury and census data show. Those communities include areas of California’s technology-rich Silicon Valley.
Read the full article here: Rich Take From Poor as U.S. Subsidy Law Funds Luxury Hotels