A Guide to New Markets Tax Credits for Nonprofits

Nonprofits are often the pillars of their local communities, providing a wide range of vital services and resources to families across the country. In low to middle-income neighborhoods, nonprofits play an especially important role in supporting the local community. 

If nonprofits aim to expand their reach into low and middle-income communities, they may stand to benefit from New Markets Tax Credits (NMTC): a tax credit introduced in 2000. In 2023, the U.S. Treasury Department allocated $5 Billion in tax credits toward this program, providing ample opportunities for expanding nonprofits. 

In this overview, we explore what New Markets Tax Credits are, when they can be used, and how nonprofit organizations, and their wider communities, can benefit from these opportunities. 

To illustrate our point, we’ll share a hypothetical example of how a nonprofit might use the NMTC program to fund the development of a new facility. Finally, we will also outline the various ways in which Smith + Howard’s nonprofit accounting professionals can support organizations in pursuing these opportunities and managing ongoing reporting requirements. 

What Are New Markets Tax Credits?

New Markets Tax Credits are tax credits that prioritize investment into economically distressed communities. The credit can benefit nonprofits up to 20% of construction costs for qualifying facilities.

Nonprofits may use New Markets Tax Credits in partnership with investors, such as banks and other financial institutions, to help fund the construction of new projects that further the mission of the nonprofit. Investors receive the tax credit and may use this to offset their federal income tax liability. In many instances, nonprofit organizations use this investment to supplement funding from a capital campaign. 

To use a NMTC, nonprofits must create a separate legal entity known as a Community Development Entity (CDE) to manage the new project. The nonprofit funds this entity with its own donor contributions and the private investor funds a supplemental amount, which they receive back as a tax credit after seven years. 

NMTCs are designed to be a win-win for all parties. Nonprofits are able to access a new source of funding to invest in important projects that further their mission, while banks and other investors receive a tax credit in excess of their original investment. Accessing this credit does come with additional administrative and reporting requirements, but in many instances, the end result justifies this additional effort. 

A Hypothetical Example: Using a New Markets Tax Credit

While the NMTC program has been around for over 20 years, many nonprofit organizations do not realize the opportunities the program affords. To illustrate its effectiveness, and outline the process, below, we’re outlined a hypothetical example of an early childhood education nonprofit called Bright Futures, that wishes to open a new facility. 

As an early childhood education nonprofit, Bright Futures’ mission is to provide educational services for children in low to middle-income communities. As part of a planned expansion, it plans to open a new early childhood education center in a low-income neighborhood at a total cost of $10 million. 

Bright Futures starts a capital campaign, raising $8 million toward the funding of the new facility. In addition, Bright Futures receives a commitment from a financial institution to invest $2 million, provided the nonprofit and the financial institution pursue a New Markets Tax Credit for the project. 

A Community Development Entity (CDE) called Bright Futures CDE is set up and the financial institution invests cash in the CDE which then makes a loan to the qualifying project, also known as the Qualified Active Low Income Community Business (QALICB). The QALICB entity, a wholly owned subsidiary of Bright Futures, manages the project, fulfilling all compliance and reporting requirements of the NMTC program over a seven-year period. In each of the seven years, the financial institution receives a tax credit against its federal income tax liability.

While there are additional administrative and reporting requirements that must be satisfied, in this scenario, using a NMTC enables the nonprofit to raise an additional $2 million toward the costs of the project, offsetting the amount it must raise through a capital campaign and other funding sources.    

Get Support Pursuing a New Markets Tax Credit from Smith + Howard

The New Markets Tax Credit program can be a great fit for many expanding nonprofit organizations, allowing access to an additional source of funding that can bring ambitious projects within reach. 

While many nonprofit organizations are dissuaded from pursuing this opportunity due to the administrative and reporting requirements it brings, with the support of an experienced accounting firm, these alone should not discourage nonprofits from the opportunity. 

At Smith + Howard, we support nonprofit organizations seeking NMTCs in several ways. In the early stages, our team can help you determine whether your organization is in a qualified low-income community where new projects may qualify for the credit. Our professionals are also happy to facilitate introductions to financing partners with a track record of participating in NMTC projects. 

After this, Smith + Howard’s team is available to help nonprofits establish the Community Development Entity and fulfill ongoing financial reporting and tax requirements. Nonprofits may have to file a separate tax return for these entities or include additional disclosures on their audited financial statements: both areas where Smith + Howard professionals can assist. 

To learn more about how Smith + Howard can help your nonprofit capitalize on the opportunities of New Market Tax Credits, contact an advisor today.