The American Jobs Creation Act of 2004 amended the New Markets Tax Credit program (“NMTC”) to provide that certain targeted populations may be treated as low-income communities. The Internal Revenue Service provided some guidance on the topic in Notice 2006-60 and in proposed regulations that were issued in 2008. Following a lengthy comment period, final regulations were released in December of 2011.
Under the final regulations, the term “targeted populations” means individuals, or an identifiable group of individuals, including an Indian tribe, who (a) are low-income persons; or (b) otherwise lack adequate access to loans or equity investments. An individual is considered to be low-income if the individual’s family income, adjusted for family size, is not more than (a) 80% of the metropolitan area median family income or (b) the greater of 80% of the non-metropolitan area median family income or 80% of the statewide non-metropolitan area median family income.
In order for an entity to be treated as a qualified active low-income community business for targeted populations, it must satisfy one of the following criteria: (1) at least 50% of the entity’s total gross income for any taxable year is derived from sales, rentals, services, or other transactions with individuals who are low-income persons (the gross income requirement); (2) at least 40% of the entity’s employees are individuals who are low-income persons (the employee requirement); or (3) at least 50% of the entity is owned by individuals who are low-income persons (the ownership requirement). The determination of whether an employee is a low-income person is made at the time of the hire and is effective throughout the time of employment, without regard to any increase in the employee’s income after the time of hire. The determination of whether an owner is a low-income person is made at the time the qualified low-income community investment is made, or at the time the ownership interest is acquired, whichever is later, and is effective throughout the time the ownership interest is held by that owner.
Unfortunately, the regulations only address the low-income aspect of targeted populations. With respect to individuals or groups that lack adequate access to loans or equity investments, the IRS invited taxpayers to submit additional comments identifying individuals or groups that may be considered to lack such access along with the reasons for the classification. The IRS further requested suggestions for ways to limit additional targeted population rules so that the purposes of the targeted populations provisions are not abused.
The final regulations became effective December 5, 2011 and can be found in Vol. 76, No. 233 of the Federal Register.