More Investors Ahead? IRS Issues Favorable New Guidance on NMTC
By Caitlin Jones
3 min read
The Internal Revenue Service has issued favorable new guidance for the federal new markets tax credit program, including clearing a roadblock to the entry of individuals as investors.
The new guidance was welcomed by practitioners at a June conference in Washington, D.C. sponsored by Novogradac & Company LLP.
In Revenue Ruling 2010-16, the IRS held that the new markets tax credit will not be classified as a “passive” credit for individual taxpayers making a qualified equity investment (QEI) in a community development entity, either directly or through a partnership, provided that this acquisition of the QEI is not in connection with the conduct of a trade or business by the individual or partnership.
For individual investors, this means that the NMTC will not be subject to the federal tax law’s passive activity rules, which limit to a deduction-equivalent $25,000 the maximum amount of passive credits and passive losses that an individual taxpayer can utilize each year to offset taxes on non-passive income such as wages.
To date, the predominant investors in NMTCs have been corporations, mainly financial institutions, since the passive loss rules don’t apply to them.
At the Washington conference, speakers hailed the new ruling and suggested it could open the way for NMTC investments by high net-worth individuals. San Francisco CPA Michael Novogradac, of Novogradac & Company, described the ruling as “pretty big”¦bringing in a new investor class.” Washington, D.C. attorney Jerome Breed, of Bryan Cave LLP, called it “good news, in terms of trying to open up the market.”
But Novogradac, Breed, and Chicago attorney Scott Lindquist, of Sonnenschein Nath & Rosenthal LLP, suggested that to maximize the benefit of the ruling there needs to be enactment of a pending legislative change to allow the NMTC to offset federal alternative minimum tax liability. The combination of the new guidance and the AMT exemption may make the AMT “an attractive investment for individuals.” Lindquist said.
The practitioners also cited some caveats. Breed said the tax law’s at-risk rules also apply to tax credits and might therefore be an issue for some individuals investing in NMTCs. In addition, Novogradac said that while the NMTC isn’t treated as a passive credit, there might also be losses that flow through to individual investors that are classified as passive losses and therefore still subject to the passive loss limitation.
(Ruling: http://www.irs.gov/pub/irs-drop/rr-10-16.pdf)
Second Revenue Ruling
New IRS Revenue Ruling 2010-17 expands the scope of prior Revenue Ruling 2003-20, which held that the amount of a QEI made by a limited liability company (LLC) that is classified as a partnership includes cash from a non-recourse loan to the LLC that the LLC invests as equity in a CDE. The new ruling extends the same treatment to cash from recourse loans as well.
