Targeted Populations May Pose Difficulties
By Caitlin Jones & A. J. Johnson
4 min read
August, 2006: Recent guidelines that allow New Markets Tax Credit investments in businesses serving “targeted populations” outside of low-income census tracks may prove tough to implement.
Under NMTC implementing legislation enacted in 2000, Congress required that firms receiving the tax credit investments be located in these communities. Low-income census tracts are defined as those with either a 20 percent poverty rate or, if not located in a metropolitan area, have a median family income of no more than 80 percent of statewide median family income.
Market participants had hoped that Notice 2006-60, released by the Internal Revenue Service and the CDFI Fund, would effectively broaden the use of NMTCs to fund businesses located in moderate-income communities, as long as those firms benefit low-income persons or Hurricane Katrina victims.
Experts say that these guidelines will be difficult to put into practice.
“We were hopeful that the new rules would get tax credits to businesses outside the low-income tracks to help poor people or those hit by Hurricane Katrina – but as it stands now we really can’t put them to use,” said Richard Campbell, executive vice president of Jackson, Miss-based Enterprise Corporation of the Delta, a community development entity serving the Gulf Coast. “The problem is that it’s just too hard to meet the compliance guidelines,” he added.
Campbell noted that under the first of three alternative tests provided by Notice 2006-60, a business outside a low-income census tract could qualify for NMTCs if at least 50 percent of its total gross income – including sales, rentals, or services – is derived from low-income individuals. The business can be located in a census tract for which the median family income is up to 120 percent of area median family income. Low-income individuals are defined as those earning no more than 80 percent of area median income.
The obstacle posed by this requirement, Campbell said, is the difficulty many businesses would have certifying the income of their customers. “Say you have a grocery store – how would you certify that people coming in the door are low income?” he asked.
Campbell said that it would also be difficult to comply with either of the two other alternative tests: a requirement that at least 40 percent of a firm’s employees are low-income individuals, or that at least 50 percent of the entity is owned by low income individuals.
Notice 2006-60 applies the same categories and percentages to businesses serving individuals that have lost homes or jobs located in areas devastated by Hurricane Katrina. This targeted populations category would be applicable to firms located in census tracts with median family incomes of up to 200 percent of statewide median income.
Jerry Breed, a tax attorney at Powell Goldstein LLP, said that the business income guidelines might work in some instances covering firms that have identified customer lists, such as those that rent property or run charter schools. “But there would be a lot of businesses where this wouldn’t be workable,” he said.
The category of employee income would also pose difficulties given the fact that the owners of many small businesses, which often hire part-time workers, are not used to verifying the overall income of their employees, Breed said. In addition, ownership verification would be challenging, particularly with multi-business enterprises like shopping centers.
Breed also said there could be another problem with the targeted population guidelines: the possibility that they could lead to the use of NMTCs to fund enterprises outside of the intended scope of the program. “Consider the case of a luxury hotel which employs a large number of low-income workers as maids and maintenance workers,” he said. “The use of NMTCs for this business does not put the program in a good light.”
