Episode 12: New Markets Tax Credit Opportunities

Transcript

IRIS LAWS

On this episode, we'll look into the New Markets Tax Credit and what opportunities it could offer you. We'll talk about changes to the credit from OB3 and get into some practical considerations for your business. We're joined by Wes Ernst and Mike Roney from the New Markets Tax Credits team here at Forvis Mazars for a uniquely helpful look into the incentive. From your one stop for tax updates and analysis, I'm Iris.

ERIC SODERBERG

And I'm Eric.

IRIS LAWS

It's Tuesday October 14th and this is Tackling Tax.

IRIS LAWS

Hello everybody and welcome to a very special edition of Tackling Tax. I am joined today by my friend Eric Soderberg, who, believe it or not, is the magic behind our podcast. He's our producer. Devin was stuck with a client today, so he has briefed Eric fully, and Eric has agreed to jump in to help with our Fast Four stories today. Eric, welcome to Tackling Tax.

ERIC SODERBERG

Iris, it is great to be here. A little weird to be on this side of the mic, but, let's make some magic.

IRIS LAWS

It's going to be great. So, yes, before we get started with our much anticipated guests, we always start our show with the four stories that we think might be most impactful to you. So let's jump right in to these Fast Four stories of the week.

IRIS LAWS

Well, at least as at the time of this episode's recording, the country is still in the midst of a shutdown. With Senate Republicans and Democrats in a gridlock over the inclusion of healthcare considerations in the concurring resolution, we seem to be making little progress to reaching an agreement. While we have seen three Democrats agree to vote for a quote, clean CR, last week, some were surprised to see Representative Marjorie Taylor Greene say that she would support the ACA tax credits.

ERIC SODERBERG

Iris, what do you think it's going to take to get something passed and, you know, get the government reopened here?

IRIS LAWS

Yeah, that's the million dollar question, Eric, and one we'd only be speculating at. Some are saying that it'd take those in the military missing their paycheck, and that that would instigate some sort of agreement. But we'll see. The longest government shutdown to date was back in 2019. So during Trump's first presidential term, and that was 35 days.

IRIS LAWS

So we're still a ways off from that, coming in at 14 days when this episode is released.

ERIC SODERBERG

All right. Well, on a related note, the IRS has furloughed around half of its employees given the shutdown. They have, however, kept what they deem as essential employees. These include folks for the upcoming filing deadline, implementing new tax laws, and the team tasked with IT modernization.

IRIS LAWS

So, Eric, I'm sure you're aware because as part of this firm, it's impossible not to know. But the 10/15 deadline is coming up and is that going to be unaffected by the furlough? Should our folks continue to be filing the same deadline as usual?

ERIC SODERBERG

Yes. Make sure that you are on schedule for that. There is no statutory change to the requirement to file by the upcoming deadlines despite the furlough.

IRIS LAWS

I think a big question too, is IRS exams. I guess really that question is twofold. What about if you're currently under exam? And then what about the potential for new exams upcoming?

ERIC SODERBERG

That is a great question. We have heard from our friends at the IRS that while they are furloughing some of the agents responsible for handling exams, team leaders have now been deemed essential and will continue with the current exams. Now for new exams, depending on how long this lasts, that will be an interesting question to see if the rate of exams they take on will be affected.

IRIS LAWS

In another piece of IRS news, there is now a new role: the CEO of the IRS.

ERIC SODERBERG

Okay, hold on, hold on. Did they just change the title of the commissioner to CEO or what's happening there?

IRIS LAWS

Yeah, very valid question. And actually, no, there is still a commissioner, but this new role is being taken by Frank Bisignano, the commissioner of the Social Security Administration. Of course, this fact has many people wondering if there will be changes to policy and information sharing, given this choice of leader and what implications that could have.

ERIC SODERBERG

And finally, it is currently possible for the IRS to levy penalties without a jury trial. But that may change, Iris. Given the most recent case, Securities and Exchange Commission versus Jarkesy. So, this case went all the way to the Supreme Court, which held that in the case of fraud, SEC cases would have to go to a jury trial.

IRIS LAWS

But that's specific to the SEC, right? Or did that also involve the IRS?

ERIC SODERBERG

That's correct. It is specific to the SEC in this case, though, the question is whether this ruling will be used to set precedent for the IRS as well. We will have to wait and see.

IRIS LAWS

Very interesting. And Eric, well done. Devin briefed you well. Thank you so much for joining us for our Fast Four. Stick with us as we transition to the main portion of our episode, Planning Insights.

IRIS LAWS

On today's segment of Planning Insights, we're joined by Wes Ernst and Mike Roney. Wes Ernst is a partner in our assurance practice out of Cincinnati. When not working with clients in the healthcare sector, he is busy helping them with the New Markets Tax Credit, or shortened to NMTC, as we'll call it here. Mike Roney is a director with the firm who focuses most all of his time with NMTC within the firm's federal specialty practice.

IRIS LAWS

Welcome to Tackling Tax, Mike and Wes.

MICHAEL RONEY

Thanks for having us, Iris.

IRIS LAWS

Yeah. So hey, Wes, let's back up a minute. For those not familiar, could you give us sort of just a high-level summary of what NMTC is and why it could be an opportunity for companies?

WES ERNST

Sure, and thanks, Iris. You know, the New Markets Tax Credit program was really Congress's solve 25 years ago to steer private investment to otherwise economically distressed areas. And the way that they do that is the provision of a tax credit to attract outside investor capital. At its heart, it's really a community benefits program. So the general idea is that by bringing together stakeholders across a couple of different fronts, what you get is investment in projects and other such items in communities that will allow them to sort of break the cycle of poverty or the cycle of unemployment or what have you, and really help those communities thrive.

WES ERNST

Going forward.

IRIS LAWS

So, I guess with that backdrop sounds like a fantastic sort of conceptual program. Mike, are there certain kinds of tax payers? So like when I'm saying kinds, I‚Äôm thinking partnerships, C-corp, individuals, those kinds of things, that are eligible? Or is it a benefit potentially for everybody?

MICHAEL RONEY

It's kind of both. So on the tax side, pertnerships, C-corps, individuals, they can avail themselves of the tax credit that is in the name New Markets Tax Credit. So, as long as you have federal liability, because this is a federal program, that is large enough to utilize that tax credit, so long as you're able to participate, you can definitely take advantage of that tax credit.

MICHAEL RONEY

The benefit can have more for just our our audience participants sake. It's much more of a funding program for community benefits. And kind of, as Wes alluded to, yes, tax credit in the name, that tax credit is designed to drive investment into these low income areas. But really for our audience and for the companies that participate here, it's really a funding mechanism to help them offset costs and help them to reallocate capital elsewhere, helping their ROI, helping their bottom line while also helping them build a project that is advantageous and helpful for the community that that it's located in.

IRIS LAWS

Does that mean that they have to be involved in developing real estate, or can you just decide, hey, I'm an investor with some liquidity here. Is this something that I could be involved in or how does the whole funding piece work then?

MICHAEL RONEY

So you mentioned real estate there. I think that's maybe a misconception of the program, kind of like the way that the tax credit is named. There's a lot of misnomers, but there's some nuance here. Most people, when they look at a community or they see development, what optically helps them is to see a building being built or seeing, you know, construction equipment out there moving dirt.

MICHAEL RONEY

And we think, oh, that's development. That's a benefit. The New Markets program does that, but I'd say the majority, and as of the last data from the government, from the Treasury Department, roughly 55% of these dollars go to non-real estate projects. So, when you think about that, think about equipment, and think about other areas of spending for a company, for a project, for a community that are, yes, development, it can be development, it can be real estate, but often, more often than not, it goes to other uses or other kind of capital projects.

MICHAEL RONEY

They're not necessarily real estate.

IRIS LAWS

So I think you mentioned transferability when we were talking about this, you know, preparing for this podcast. What was the point you wanted to make about transferability in this sense?

MICHAEL RONEY

So the credit itself, and that's kind of where we talk about the credit part. And this may be where the discussion will turn a little bit for, you know, your the audience on kind of, yes, it's a program for funding, but it's also a tax credit. How does that tax credit work? The New Markets Tax Credit, the actual tax credit that's received as a result of these investments, goes to a corporate investor typically.

MICHAEL RONEY

And I think in this space you're going to see the tax credit at issue get gobbled up by 5 or 6 large banks. You know, when you think about the large banks in the United States, think of Chase, think of US Bank, think of Capital One, etc. that's kind of where the tax credits going. But even those banks that large of a size, they don't have an unlimited federal liability.

MICHAEL RONEY

So the tax credits can be transferred, on the secondary market syndication to others. And so that's maybe where, you know, other smaller banks, other individuals, other, you know, investors might have an appetite for not necessarily a full New Markets Tax Credit project with a large liability, but a piece of that, and that's maybe where they can avail themselves of a tax credit to claim on their federal return.

MICHAEL RONEY

That is not necessarily as a direct participant in the New Markets program, but as a secondary participant.

IRIS LAWS

That's super helpful. I think, Wes, turning to you. You know, I've heard about the New Markets Tax Credit for a while. It's not new, right? I mean, has it been successful in the past?

WES ERNST

Yeah. No, it's not new. I mentioned in the opening comments it was originally enacted as part of legislation back in 2000. So we're coming up on two and a half decades now, and I think maybe just a little bit of extra orientation. The annual funding amount is $5 billion‚Äîthat's with a B‚Äîdollars in New Markets Tax Credit allocation.

WES ERNST

And just so the listeners kind of have a sense of what does that translate to kind of down market, which is roughly 500 projects a year. So even if you went further, you could talk about it on a state-by-state basis. As Mike said, it's federal. So there's no sort of state-specific requirements, but roughly ten projects per state,

WES ERNST

if you just did a simple average, are going to be somehow some way getting funding or otherwise participating in this in this program. And because of sort of the wide, sweeping nature of it all, I mean, it's industry agnostic. So it's not like, you know, the investment has to be done in healthcare or manufacturing and that's it.

WES ERNST

It is largely something that can be steered towards any project type, whether that's, you know, being sponsored by a for-profit or not-for-profit company doesn't really matter. I mean, there are a few exceptions, just like there are in any type of program. But, you know, in large part, anyone who has a project in a qualifying area can take advantage of that.

WES ERNST

And because of that sort of elasticity and that that flexibility, it has been very, very successful. I mean, some of the numbers you see are things such as eight dollars of sort of return for every dollar of tax credit allocated and several hundred million dollars worth of square footage that's been constructed over the time period that, again, at its heart, has all been around the idea of driving economic activity and economic benefit in low-income and otherwise distressed communities.

MICHAEL RONEY

And Iris, I think Wes makes a point there to distinguish, yes, it's a tax credit program, but as we mentioned before, it's a community benefits funding program. So you don't have to be a taxpayer to avail yourself of the program. That's why the nonprofit space, it's very powerful for them. It's powerful for for-profits because it helps, you know, reallocate capital.

MICHAEL RONEY

So I just want to make that distinction and clarification that, yes, tax credit in the name, but you don't have to be a taxpayer. And nonprofits are a great candidate for project funding through this program.

IRIS LAWS

Yeah, that is a great distinction. Well, it sounds like it's doing well and has done well. And that leads me to, I think I've heard it's in OB3, the One Big Beautiful Bill Act. Mike, you're the tax guy. This is a tax bill. What changed with it, If anything, in OB3?

MICHAEL RONEY

So OB3 was great for the New Markets program. I don't know if it's actually great for others, but, well, that remains to be seen. For New Markets itself, OB3 made our program permanent. Up until this point it had been subject to reauthorization. Over its life the last 25 years, eight times it had been reauthorized.

MICHAEL RONEY

So I guess the old phrase goes ninth time was the charm. So we have a permanent program. It's going to be funded at $5 billion with a B for the next foreseeable future. There may be kind of one point to make there, though. We do have a new award round coming up later this fall that is going to be $10 billion of annual funding, or not annual funding, $10 billion of funding for this round, which is just,

MICHAEL RONEY

we knew, the industry knew that the cap was coming. The program was going to expire at the end of this year, 2025. So, in all the wisdom of the Treasury Department, they just cobbled together the rest of the dollars that were available. We've got $10 billion coming down the street. But the point is, going forward, it's going to be $5 billion annually.

IRIS LAWS

That's great news. $10 billion dollars is a lot of dollars. So with that 10 billion Wes, how do we know what areas qualify for that amount of money?

WES ERNST

So, you know, we talked about the sort of the low income side of things. It's really based on census tract. So T-R-A-C-T, census tract, obviously whenever they do the decennial census, they're, they're counting population, but there are a number of other items that are getting categorized and sort of fed into the data machine by the US Census Bureau during that time.

WES ERNST

And so as part of that, they will come up with sort of certain criteria that makes you eligible to put a project in a New Market-eligible zone. You know, roughly 40% of the census tracts are qualified, and you can find those on what's called the CDFI website. So the CDFI fund is an agency within U.S. Treasury that is sort of the oversight mechanism of the program.

WES ERNST

And they have a free map. It doesn't require any sort of special access or anything like that. And you can go and put in an address. If you're wondering if you have a project that's eligible, you can type in the address of where that project might be, and it'll tell you whether you're sort of in or out.

WES ERNST

And that is an important distinction, which is it very much is a you have to be on the right side of the street kind of item. And so, you know, making sure that the project is, in fact, in an eligible zone is very, very important on the front end because otherwise you end up sort of spending a lot of time and effort only to realize down, you know, later on that it's no good.

WES ERNST

And so Mike and I, when we often field questions from from individuals interested and in, in participation, our very first question is well, do you have an address because that's going to drive a lot of what happens from that point forward.

IRIS LAWS

So I guess that begs the question. I'm CFO sitting in my chair. How do I figure out how to participate, whether it be, getting those downstream tax credits, Mike, as you said, or participating in a way of you're getting funding or something like that, like what's my step one that y'all would recommend?

WES ERNST

So it sort of depends on which side of the the house you're on. If you're a company who is looking to invest in a significant capital project of some form or fashion, or just in general terms, you know, your first step is determining where is that project going to be located. And then kind of what is the sources and uses side of that project.

WES ERNST

And what I mean by that is the the program requires sort of a minimum spend in order for it to, we often say the juice to be worth the squeeze, because there's just a lot of kind of legal paperwork and other things that are important to get to get done. So you want a minimum spend. We usually say 5 million or more.

WES ERNST

If you're talking about a project, but checking eligibility and then starting to firm up, things like what's my overall project budget? Is it $10 million? Is it $15 million? You know, and what is this project going to do, especially what is it going to do for the community? Is that it's going to create jobs for individuals in that area?

WES ERNST

Is that it's going to produce other economic return of some form or fashion that once one project gets built, you know, another one will? Is it going to provide healthcare services that otherwise people in that low-income area are driving 75 miles to otherwise obtain? So that's sort of the start of it, which is I've got a project of some mass.

WES ERNST

It's in a qualifying zone, and I have clear and distinct benefits for that particular community. That's sort of on the company's sponsorship side. And Mike, maybe you want to address the the tax side.

MICHAEL RONEY

So Wes, on the, kind of, the tax credit side or what I might think about is the investor side, the investor, as we mentioned, one of the large banks. So think of it as maybe Chase Bank in this scenario, they are seeking those projects to invest in or maybe to think about a different way to provide some capital into that community, into that project that would not have been there before. So they also kind of look at the same function or look at the project and evaluate it in a very similar way, kind of where is it located, what are the community benefits and does it meet their investment criteria.

MICHAEL RONEY

In the past you've seen kind of it it mirrors kind of what the administration is doing, whatever that current administration is. So, you know, in the 2008 time frame, we saw a lot of healthy foods initiatives. In the first Trump administration, we saw a lot of domestic manufacturing initiatives. Under Biden, we saw a lot of, you know, healthcare-focused.

MICHAEL RONEY

And then now we're we're seeing a lot of, you know, investment groups and community development entities seek rural projects, you know, whether that'd be rural healthcare, rural manufacturing as well. That's not a directive from the government by any means. But I think it's just a lot of people trying to read the tea leaves a little bit and going kind of where, where we might be successful if we allocate our dollars.

MICHAEL RONEY

And ultimately these groups, these investors want to you you'll be able to do this over and over again to one, help the communities, but also, you know, take advantage of the tax credits.

IRIS LAWS

So, you know, we're coming up to year-end planning, right? And folks are trying to think about how to wisely use their money in plans near- and long-term. Is this something that they could have a benefit next year if they invest by the year end, or is there a longer kind of lag? What's the timeframe for where they can get a return on their investment?

MICHAEL RONEY

That's a great question. So the New Markets Tax Credit program, it's not necessarily a a risk or trap to think about. It's more so there's a barrier of entry to consider here. The one of those barriers is we have a finite amount of dollars to go around. So just because you have a qualified census tract or a qualified project does not necessarily mean you're going to be a receiver of the funding, not necessarily going to be receiver of the tax credit itself.

MICHAEL RONEY

And the reason for that is 10 billion sounds like a big number. 5 billion sounds like a big number. They are. But we have 50 states, you know, 10 projects per state, there's not a lot to go around. So there's, it‚Äôs highly competitive. And so because of that what we recommend for companies is go through your normal development process, go through your normal CapEx spending and planning.

MICHAEL RONEY

If New Markets makes sense, we can come alongside to that project, help you understand whether or not New Markets is possible for this type of project, and whether you should consider it as part of maybe your investment or your capital strategy. The key takeaway to all that is it's very competitive. So just because you qualify doesn't mean you're going to get it.

MICHAEL RONEY

And then, New Markets is not meant to be a dollar-for-dollar payfor. Roughly kind of your back of the napkin calculation, depending on your project size, it's roughly 15 to 20% of your capital stack. So it's something to help, you know, take you over the top, which means that you have to have your funding and kind of your development and your rest of your project scope, timing, all your parties, all your third-party participants to help you move the project forward first before you can truly take advantage of the New Markets program.

MICHAEL RONEY

So along with the long answer to your short question, Iris, is if you get lucky, you can get some project funding, you know, in the next month or two. Usually it's a longer life cycle. I'd say 6 to 9 months worth of planning before you can really take advantage of that funding.

IRIS LAWS

And was there a seven-year something that you were mentioning earlier? Again, I'm totally interested in what that is too.

MICHAEL RONEY

Well, I think the one thing that we often forget to mention is the actual tax credit percentage. So the New Markets Tax Credit is a 39% tax credit on the underlying investment. So the quick math is if you have a $10 million investment that creates $3.9 million in tax credits. Well, it's not day one you get 39%. The government and Congress was pretty smart in figuring out if you want to have lasting impact in these low-income communities, you need to have some long-term investment and some stewardship and get a group of motivated individuals to stay together.

MICHAEL RONEY

Well, they decided seven years seems like, a long enough time. So because of that, these transactions, these, you know, funding packages stay together for seven years, which means your tax credit is claimed over seven years. So 39% not on day one, it's 5% in year one through three, 6% in years four through seven. So you know, that's why the syndication market becomes so attractive.

MICHAEL RONEY

Because you can take a portion of that and, you know, offload it to another investor, another taxpayer, or you can keep it for yourself. But it renews, in a way, it renews itself over seven years. So these are meant to be sticky transactions where groups stay together and it's not a flash in the pan or walk away type transaction for the community itself.

IRIS LAWS

Does that mean there's like a recapture provision? I'm thinking, you know, some of these clean energy deals that I'm used to like. That's one of the risks. Is that in play here?

MICHAEL RONEY

There is some recapture to consider. There's only three scenarios where that recapture could occur. And that would require the tax credits to be given back. But those are very few and far between. And then not to have raised a red flag or raise an alarm for the listeners, but that's the way that the program operates. There's some heavy underwriting, the investors being sophisticated as they are, and the, you know, the projects themselves get a very strong look under the hood, so to speak, to make sure that we don't run into that situation where a project fails.

IRIS LAWS

That makes a lot of sense. We're we're in the the zone of benefits to taxpayers. Again, my background, more familiar with the low-income housing side of things, which is also a tax credit, feels similar-ish. Would there be any overlap or the ability to take both benefits, or is that not the case?

MICHAEL RONEY

So, for LIHTC, low-income housing generally does not mix well with New Markets. The reason for that is just basically you have to have some unique spending on both sides. So you can't necessarily mix the two. It's possible for them to be involved in the same project, but they'd have to be completely separated. What we see more often is what we call a twin deal with historic tax credits.

MICHAEL RONEY

So historic will pay for something like the qualified real estate expenses, you know, your windows or whatnot. New Markets can come in and help with the underlying equipment or, you know, some of the real estate concerns that are there. So those match up well. New markets is complicated. You kind of add some of those other layers it becomes more complex as well.

IRIS LAWS

That's super helpful. What about state credits? Is there any state, you've mentioned a few times this is federal, right? But what about at the state level? Is there anything that could go along well there?

MICHAEL RONEY

So that's a great point, Iris. The federal program is kind of the main driver for the whole thing. And what most people, when they hear a New Markets Tax Credit program, NMTCs is what you would think. Several states, let's say, Illinois is one of those. In the past, Ohio has had some in the past Maine, Mississippi, Louisiana, they have a state program, as well.

MICHAEL RONEY

And that just means that as long as you have liability in that state, you can take advantage of the New Markets program there as well. It mirrors in most cases, very much the federal program. The main difference might be when you can take your tax credit, usually there's a bit of a delay and then you take more tax credit in the years three through seven.

MICHAEL RONEY

The nice thing about the way that the state programs work is you can pair them alongside with the federal program. So oftentimes you see community development entities or the investors who have, a federal focus as well as a state focus, try to find a project that hits both of those buckets, and they use the same dollars to increase their benefit.

MICHAEL RONEY

But at the same time, helping those low-income communities that are in those states.

IRIS LAWS

Hey, that's all great information. I think those were the questions I kind of had top of mind, but obviously want to give you guys the opportunity. Is there anything else, Wes or Mike, that you'd want to touch on? Just again, our listeners who are in the decision seats for a lot of these companies are looking out for, you know, the futures of their planning opportunities and things like that.

IRIS LAWS

So anything else you'd want to touch on?

WES ERNST

You know, I think Iris, Mike and I often say to anyone who might be listening, just nothing more than, hey, having some knowledge about this program is worth exploring it if you think it might be something that you could seek in really any potential future transaction. And part of the reason for that is it works really well when you are successful, but you also know very early on, typically, if it's not something that's going to be for you.

WES ERNST

So in many instances, just keeping this kind of tucked away in your, your toolbox, so to speak, as a potential item of use is valuable because other than maybe needing a little bit of time to explore with Mike and I or whomever, it might be, you know, you're not going to necessarily risk a whole lot by simply trying to see if what's the art of the possible for your particular organization.

WES ERNST

And if it does work, it works very, very well in that regard.

IRIS LAWS

Great. Well, that's a shining endorsement, at least to get in touch with you guys. I've learned a lot today and really appreciate your time. So with that, we are going to move on to our last segment of the day, our Focused FORsight of the week.

IRIS LAWS

Each episode will bring you what we call a Focused FORsight of the week, an article or webinar that might be of interest to you. This week's Focus FORsight is an article written by Mike Roney, who you heard from today. Titled The New Markets Tax Credit Program Now Permanent Under OBBBA, this one serves as a good reference point to the credit

IRIS LAWS

and what changed with the recently passed act. And that's our show. Thanks for joining. Remember to subscribe and listen in for the next episode of the podcast. Until next time.

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The information set forth in this podcast contains the analysis and conclusions of the panelists based upon his, her or their research and analysis of industry information and legal authorities. Such analysis and conclusions should not be deemed opinions or conclusions by Forvis Mazars or the panelists as to any individual situation as situations are fact-specific. The listener should perform their own analysis and form their own conclusions regarding any specific situation.

ANNOUNCER

Further, the panelists conclusions may be revised without notice, with or without changes in industry information and legal authorities.

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