You can claim a tax credit for a qualified equity investment in a qualified community development entity made after December 31, 2000. This is called the new markets credit.

Amount of credit. You claim the credit over a period of up to 7 years. To find the amount of your credit each year, multiply the amount you paid the qualified community development entity for your investment by a percentage. The percentage is:

• 5% for the year the investment is made and each of the next 2 years, and
• 6% for each of the next 4 years.

Thus the credit totals 39% of your investment over a 7-year period.

To claim the credit for a year, you must hold the qualified equity investment on the credit allowance date for that year. The credit allowance date is the date you make the initial investment and each of the next 6 anniversary dates.

Qualified equity investment. Generally, this is the cost of any stock in a corporation or any capital interest in a partnership if the following requirements are met.

• The corporation or partnership is a qualified community development entity (defined next).
• You acquire the investment on the original issue date for cash.
• Substantially all of the cash is used to make qualified low-income community investments (defined later), or at least 85% of the entity's total gross assets are in qualified low-income community investments.
• The qualified community development entity designates the investment for purposes of the new markets credit.

Qualified community development entity. This is any U.S. corporation or partnership that meets the following requirements.

• Its primary mission is serving, or providing investment capital for, low-income communities or persons.
• It maintains accountability to residents of low-income communities through their representation on any governing or advisory boards of the entity.
• It is certified by the Secretary of the Treasury as a qualified community development entity.

Qualified low-income community investment. This means one of the following.

• Any capital or equity investment in, or loan to, any qualified active low-income community business (defined next).
• The purchase from another qualified community development entity of any loan made by that entity that is a qualified low-income community investment.
• Financial counseling and other services specified in regulations to businesses located in, and residents of, low-income communities.
• Any equity investment in, or loan to, any qualified community development entity.

Qualified active low-income community business. This is any corporation (including a nonprofit corporation), partnership, or sole proprietorship, if all the following statements are true for the tax year.

1. At least 50% of its total gross income is from the active conduct of a qualified business (defined next) within a low-income community.
2. A substantial part of the use of its tangible property (whether owned or leased) is within a low-income community.
3. A substantial part of the employees' services are performed in a low-income community.
4. Less than 5% of the average of the total unadjusted bases of the property of the business is from:
1. Nonqualified financial property (generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, and annuities), or
2. Collectibles not held primarily for sale to customers.

Also, a business that would qualify if it were separately incorporated is treated as a qualified active low-income community business.

Qualified business. This is generally any trade or business except one that consists primarily of developing or holding intangibles for sale or license. However, the rental to others of real property located in a low-income community is a qualified business only if there are substantial improvements located on the property. Also, a qualified business does not include any business listed earlier in item (5) or item (6) under Nonqualified employees in the Empowerment Zone Employment Credit section.

Low-income community. A low-income community generally means any population census tract if any of the following apply.

• The poverty rate is at least 20%.
• If the tract is not located within a metropolitan area, the median family income is not more than 80% of statewide median family income.
• If the tract is located within a metropolitan area, the median family income is not more than 80% of the greater of the statewide median family income or the metropolitan area median family income.

Recapture. The credit is recaptured if, within the 7-year credit period, the community development entity is no longer qualified, substantially all of the proceeds of the investment are no longer used for a qualifying purpose, or the investment is redeemed.

More information. For more information about the new markets credit, see section 45D of the Internal Revenue Code.

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