2016 year-end tax letter: Changes to the R&D credit provide opportunity for startup companies and small businesses

The New Markets Tax Credits (NMTC) program has been a powerful deal-closing tool used to attract and retain businesses in qualified low-income census tracts since its approval by Congress in 2000. Administered by the Community Development Financial Institutions (CDFI) Fund, a branch of the U.S. Treasury, tax credits are granted to Community Development Entities (CDEs), which allocates tax credits into both private and publicly-sponsored projects. Over $53 billion in allocations have been awarded to date with another $3.5 billion to be released this year. Projects that have a significant community impact, such as job creation or serving an unmet need for critical services in a community, are most desirable to CDEs. Projects undertaken by public entities can also utilize the NMTC program. For example, workforce training facilities or other public facilities without a direct funding source that have difficulty in securing capital are eligible. The credits, based on eligible cost, can bring up to 20% of the capital to a project, making them valuable, but also competitive to secure.

How can the NMTC program help attract or retain businesses in your community?

Traditionally, many economic development organizations have not played a significant role in the NMTC process. As economic uncertainty looms, economic developers and businesses should pursue alternative financing tools to attract and retain businesses. The NMTC program could provide the additional funding used to secure and close a deal in your community.

First, understanding the census tracts within your community that are in qualifying census tracts is critical. Baker Tilly’s mapping tool can be used to identify the areas that are distressed (or severely distressed), which is an eligibility requirement to use the NMTC program. Additional preference is given to projects within severely distressed census tracts, making those most desirable.

Second, business retention efforts can be made to target companies within those qualifying census tracts. As they are considering expanding, it is worth mentioning the NMTC program as a way to assist in financing that expansion.

Lastly, as businesses consider relocating to your jurisdiction, it is your organization’s responsibility to bring this to their attention. While the program is valuable and competitive, it is still obscure. Many businesses are not aware of it and overlook its potential.

What do you need at know as an economic developer?

As local governments consider a business retention and attraction effort, the NMTC program is a valuable tool available at their disposal. This can be used as a differentiator or as a gap closing tool. There is no cost to a community to execute a transaction, making the program even more attractive to communities.

As economic developers connect with new or existing businesses within their community, it is worth discussing the NMTC program and how it can be used to close any funding gaps of a project.

For more information on this topic or to connect with a public sector economic development specialist, contact our team.

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