Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has released proposed amendments to the new market tax credit regulations that provide rules on how an entity meets the requirements to be a qualified active low-income community business (QALIC when its activities involve certain targeted populations under Code Sec. 45D(e)(2). The new proposals generally follow earlier published rules in
Notice 2006-60 (I.R.B. 2006-29, 82), which can be relied upon until the proposed amendments are finalized.

Background

  The new markets tax credit is a credit for persons that have a qualified equity investment in a qualified community development entity (CDE) on the credit allowance date. Among the requirements for a qualified equity investment is that substantially all of the cash must be used by the CDE to make qualified low-income community investments. One type of qualified low-income community investment is an investment in a qualified active low-income community business.

 
Notice 2006-60 provides rules on how an entity meets the requirements to be a qualified active low-income community business when its activities involve targeted populations. The proposed amendments to the regulations follow the general definitions of targeted populations and low-income persons set forth in Notice 2006-60 and the Riegle Community Development and Regulatory Improvement Act of 1994 (12 U.S.C. § 4702(17), (20)). Targeted populations that will be treated as a low-income community are individuals, or an identifiable group of individuals, including an Indian tribe, who are low-income persons or who are individuals otherwise lacking adequate access to loans or equity investments.

QALICB Requirements for Low-Income Targeted Populations

  Individuals are considered low-income if the individual's family income, adjusted for family size, is not more than: (1) for metropolitan areas, 80 percent of the area median family income; or (2) for nonmetropolitan areas, the greater of 80 percent of the area median family income or 80 percent of the statewide nonmetropolitan area median family income. The proposed amendments to the regulations follow the general requirements for a qualified active low-income community business set forth in Notice 2006-60.

  In general, a qualified active low-income community business is a corporation, including a nonprofit corporation, or a partnership engaged in the active conduct of a qualified business if: (1) at least 50 percent of the entity's total gross income for any tax year is derived from sales, rentals, services or other transactions with individuals who are low-income persons; (2) at least 40 percent of the entity's employees are individuals who are low-income persons; or (3) at least 50 percent of the entity is owned by individuals who are low-income persons. Definitions of employee and owner for this purpose are also provided.

 
Notice 2006-60 and the proposed amendments provide a 120-percent income restriction. In general, under this restriction, an entity will not be treated as a qualified active low-income community business if the entity is located in a population census tract for which the median family income exceeds 120 percent of: (1) in the case of a tract not located within a metropolitan area, the statewide median family income; or (2) in the case of a tract located within a metropolitan area, the greater of statewide median family income or metropolitan area median family income. Other qualifications and restrictions also apply.

QALICB Requirements for GO Zone Targeted Populations

  Individuals are considered to lack adequate access to loans or equity investments if they are part of the GO Zone Targeted Population, meaning that the individual was displaced from his or her principal residence as a result of Hurricane Katrina and/or the individual lost his or her principal source of employment as a result of Hurricane Katrina. Notice 2006-60 and the proposed amendments provide special requirements for a qualified active low-income community business for the GO Zone Targeted Population.

  In general, an entity will not be treated as a qualified active low-income community business for the GO Zone Targeted Population unless: (1) at least 50 percent of the entity's total gross income for any tax year is derived from sales, rentals, services or other transactions with the GO Zone Targeted Population, low-income persons or some combination thereof; (2) at least 40 percent of the entity's employees consist of the GO Zone Targeted Population, low-income persons or some combination thereof; or (3) at least 50 percent of the entity is owned by the GO Zone Targeted Population, low-income persons or some combination thereof.

 
Notice 2006-60 and the proposed amendments provide a 200-percent income restriction qualified active low-income community businesses for GO Zone Targeted Populations. In general, under the 200-percent income restriction, an entity will not be treated as a qualified active low-income community business for GO Zone Targeted Populations if the entity is located in a population census tract for which the median family income exceeds 200 percent of: (1) in the case of a tract not located within a metropolitan area, the statewide median family income; or (2) in the case of a tract located within a metropolitan area, the greater of statewide median family income or metropolitan area median family income. Other qualifications and restrictions also apply.

Effective Date

  The rules in the regulations are proposed to apply to tax years ending on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. Until that time, taxpayers can rely on Notice 2006-60 for designations made after October 22, 2004.

Request for Comments and Public Hearing

  A public hearing is scheduled for January 22, 2009, beginning at 10:00 a.m. Written and electronic comments must be received by December 23, 2008.

  The IRS and the Treasury Department are particularly interested in receiving comments on the following issues: (1) the measure of income that should be used to determine an individual's income for purposes of the definition of low-income persons; (2) whether the gross income requirements should be modified to include the fair market value of goods and services provided to low-income persons at reduced fees; and (3) whether additional restrictions should be added to the employee requirements.

Proposed Regulations, NPRM REG-142339-05, 2008FED ¶49,835

Other References:

 
Code Sec. 45D

  CCH Reference - 2008FED ¶4488E

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 54,906.15