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More States Offering Their Own NMTC Programs


January 2014

The following was distributed as part of the New Markets Tax Credit Connection - Winter 2014 newsletter.

by Kevin Beattie, Senior Associate, CohnReznick

With the success of the federal program, state NMTC programs continue to enjoy popularity across the country. Seen as a proven method of spurring job creation and attracting capital investment in underserved markets, many states have passed NMTC legislation to incentivize private investment in their communities. Here are a few examples of recently enacted state NMTC legislation.

Louisiana

With the sunset of their previous NMTC program occurring at the end of 2013, Louisiana recently enacted the Louisiana New Markets Jobs Act (LNMJA), effective August 1, 2013. While maintaining many of the characteristics of the former program, there are a number of significant modifications of note. The expiring program was targeted to taxpayers who were liable for income or corporate franchise tax. The new credit under the LNMJA focuses purely on premium tax liabilities paid by insurance companies. The subsidy also receives a boost under the LNMJA. What was formerly a 25 percent credit over three years is now a 45 percent credit over four years. The credit rate is 14 percent on the first and second years, and 8.5 percent on the third and fourth credit allowance dates. A strict guideline also exists in the new program which requires 100 percent of the qualified equity investment (QEI) to be used as a qualified low income community investment (QLICI). 

A competitive application process determines which CDE will have access to the $55 million of QEI authority. Applications must be accompanied by a deposit of $500,000, refundable upon denial of the application or no earlier than thirty days after having been certified meeting the QEI and QLICI requirements. The maximum QLICI made to a qualified active low income business (QALICB) is $10 million, whether issued by one or several CDEs. The credit is nonrefundable, can be carried forward for ten years, and may be specially allocated among the owners of the entity claiming the credit.  The credit also requires annual reporting by the CDE to the state on associated job creation. 

Arkansas

Enacted on April 22, 2013, Arkansas House Bill 1832 authorized the New Markets Jobs Act of 2013, creating a tax credit against premium tax liabilities paid by insurance companies. The credit is 58 percent of the QEI, taken over seven years. The credit rate is 0 percent in the first two years, 12 percent for the next three years, and 11 percent for the final two years. Up to $166 million in investment authority has been made available under the new law.

The program introduces limitations on otherwise eligible QALICBs. It disallows a business that derives 15 percent or more of its annual revenue from the rental or sale of real estate unless the business is controlled by, or under common control with, another business that does not exceed the 15 percent revenue threshold. That business must also be the primary tenant of real estate leased from the controlled business. Other businesses not eligible as QALICBs include those that receive other state incentives that spur job creation and/or capital investment such as the Job Creation tax credit.  In addition, QALICBs must agree to retain or create jobs that pay an average wage of at least 115 percent of the federal poverty income for a family of four for the census tract. This can be waived by the state commission.   

Applications must be accompanied by a nonrefundable $5,000 fee as well as a refundable fee of 0.5 percent of the QEI. The credit itself is nonrefundable and any unused credit may be carried forward for nine years. Special allocations of the credit among partners are allowable but the credit cannot be sold in the open market. Once the credit period has expired, the QEI must be formally decertified before the full amount of the QEI can be redeemed. 

Nevada

Closely modeled after the Louisiana and Arkansas legislation, Nevada passed Senate Bill 357, the Nevada New Markets Jobs Act, effective October 1, 2013. The Nevada NMTC, a credit against insurance premium taxes, is equal to 58 percent of the QEIs issued by a CDE spread over a seven-year period.  Investors holding a QEI receive no credit for the initial two years, a 12 percent credit for years three through five, and an 11 percent credit in the final two years. In the event the insurance premium tax is eliminated, or reduced below the level that was in effect on the first credit allowance date, the credit can be applied against other taxes paid to the Department of Taxation. The Nevada law provides a total of $200 million of QEI authority, will not certify any single QEI less than $5 million, and shall not certify more than $50 million of QEI to any single applicant, including affiliates and partners. Applications for allocation authority must be submitted along with a $5,000 nonrefundable fee and a refundable fee equal to 0.5 percent of the QEI. 

In addition to the types of businesses disallowed as QALICBs under the federal NMTC program, Nevada does not allow a business that derives 15 percent or more of its annual revenue from the rental or sale of real estate unless the business is controlled by, or under common control with, another business that does not exceed the 15 percent revenue threshold and is the primary tenant of real estate leased from the controlled business. Also disallowed are businesses receiving certain state tax abatements and those that have insurance premium tax liabilities. Nevada places restrictions on the CDE and investor that are not found in the Louisiana and Arkansas laws. Eligible claimants of the credit may not manage a CDE or control the direction of equity investments for a CDE. In addition, CDEs are not allowed to pay fees to affiliates in connection with any activity under the program prior to decertification of the QEI.  Furthermore, a minimum of 30 percent of the total QEIs received by a CDE, including affiliates and partners, must be used to make QLICIs to businesses located in severely distressed census tracts. 

The Nevada credit is nonrefundable and any unused credit may be carried forward indefinitely. Special allocations of the credit among partners are allowable but the credit cannot be sold in the open market. Once the credit period is complete, the QEI must be formally decertified before the full amount of the QEI can be redeemed. 

What Does CohnReznick Think?
These three examples of newly enacted state NMTCs provide further evidence of the growing popularity of the NMTC Program. They are also prime examples of how more and more states are creating new and innovative programs designed as adjuncts to the federal NMTC Program. 

The economic recession has impacted every state in the country - some harder than others. It is clear that state governments across the U.S. are embracing the NMTC Program and its ability to stimulate economic development. We anticipate that more states will get on board by introducing new state NMTC programs or, like Louisiana, revamping and extending their current programs.

Contact:

For more information, please visit the CohnReznick New Markets Tax Credit webpage and contact David Norton, Partner, at 410-895-7827; or Kevin Beattie, Senior Manager, at 410-783-6208


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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