CDFI Fund Provides Guidance on Targeted Populations, Includes Special Designation for Hurricane Gulf Zones

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Tax Credit Advisor July, 2006: The Community Development Financial Institutions (CDFI) Fund and Internal Revenue Service have provided guidance on the designation of targeted populations under the New Markets Tax Credit program. The guidance includes a special designation in the Hurricane Katrina Gulf Opportunity (GO) Zone.

The guidance, contained in Notice 2006-60, amends IRC Codes section 1.45D-1 to loosen previous guidelines that had restricted NMTC investments to low income communities. CDEs will now be permitted to invest NMTC proceeds in moderate income tracts, as long as those businesses are owned by low-income persons, hire significant numbers of low-income persons, or predominately serve low-income persons. Moderate income tracts are defined as those located in a census tract with median family income at or below 120 percent of Area Median Income (AMI).

Background

Under current law, CDEs had been required to limit investment of NMTC proceeds to low income communities defined as census tracts with either a 20 percent poverty rate or, if not located in a metropolitan area, have median family incomes of not more than 80 percent of AMI.

With the enactment of by Congress of the Jobs Creation Act of 2004, the definition of low-income communities under the NMTC program was changed to include non-geographic “Targeted Populations.” These populations are defined as low-income individuals or groups that lack access to loans or equity investments.

The Act also adds to the geographic definition of a low income community, permitting under certain circumstances, sparsely populated areas to be designated as such. With the guidance, tracts with less than 2000 people now qualify as Low Income Communities if they are in an empowerment zone and contiguous with a Low Income Community.

The guidance from the CDFI Fund represents a response to that legislation. It follows an Advanced Notice of Proposed Rulemaking published in the Federal Register in May 2005 with comments due by July.

Applying Targeting to GO Zones

CDEs will be allowed to invest in certain businesses located in census tracts in the GO Zone with incomes higher than those traditionally served by the program if those businesses are:

  • Located in census tracts designated by the Federal Emergency Management Agency as having been flooded or extensively damaged by Hurricane Katrina;
  • Owned by, will hire, or will otherwise predominately serve individuals displaced from their principal residences and/or lost their principal residences of employment as a result of Hurricane Katrina; and
  • Are located in a census tract with a median family income no more than 200 percent of AMI.

Taxpayers can rely on the notice under further guidance is provided in the form of regulations from the Internal Revenue Service.