On Friday, June 12, the Internal Revenue Service (IRS) released Notice 2020-49 (the NMTC Relief Notice), which provides extensions for certain time-sensitive actions related to the new markets tax credit (NMTC) for community development entities (CDEs) and qualified active low-income community businesses (QALICBs) affected by the COVID-19 pandemic. The NMTC Relief Notice provides three forms of relief related to the NMTC with respect to (i) extending the deadline for CDEs to initially invest in a QALICB, (ii) extending the deadline for CDEs needing to reinvest returned proceeds in a QALICB, and (iii) extending the time for QALICBs to expend amounts for construction of real property. Each is discussed in more detail below.
Extension of Time to Make an Initial Investment in a QALICB
A CDE that has received an equity investment from an NMTC investor is required to use at least 85% of such equity investment to make qualified low-income community investments (QLICIs). QLICIs include, among other investments, capital or equity investments in, or loans to, any QALICB. A CDE must make a QLICI within a 12-month period beginning on the date it receives the equity investment from the investor. For example, if investor X made an equity investment of $10 million in CDE A on July 1, 2019, then CDE A would have until June 30, 2020 to invest at least $8.5 million into a QALICB in order for X’s investment to qualify for NMTCs.
Pursuant to the NMTC Relief Notice, if the deadline for a CDE’s 12-month QLICI investment period would be on or between April 1, 2020 and December 30, 2020, the deadline is postponed to December 31, 2020. This means that if a CDE received an equity investment on or between April 2, 2019 and December 31, 2019, the CDE has until December 31, 2020 in order for the 12-month investment requirement to be treated as timely satisfied. CDE A, in the example above, would have an additional six months to make a QLICI in a QALICB.
12-Month Reinvestment Period for CDEs
The regulations governing NMTCs generally provide that if a CDE receives a return of capital, equity, or principal with respect to a QLICI, such amounts must be reinvested by the CDE in a new QLICI no later than 12 months from when the amounts were received. The NMTC Relief Notice states that if the last day of the 12-month reinvestment period falls on or between April 1, 2020 and December 30, 2020, the deadline is extended to December 31, 2020. Similar to initial investments described above, if a CDE had a return of principal or equity related to a QLICI on or between April 2, 2019 and December 31, 2019, the CDE has until December 31, 2020 in order to make a new QLICI. For example, if CDE B received a whole or partial prepayment of a QLICI on September 1, 2019, under the general rules, CDE B would have until August 31, 2020 to reinvest the proceeds. However, the NMTC Relief Notice postpones that deadline to December 31, 2020 (an additional four months in this example).
Time Limit for Expending Proceeds for Construction of Real Property
In order to be a QALICB, an entity must meet several requirements, including that less than 5% of its property be attributable to nonqualified financial property (NQFP), such as cash, debt, equity investments, certain options and contracts, and other similar financial property. However, “reasonable amounts of working capital” is excluded from the definition of NQFP, provided it is held in cash, cash equivalents, or certain short-term debt instruments. The regulations governing NMTCs provide that proceeds of a QLICI by a CDE to a QALICB constitute a reasonable amount of working capital, if such proceeds will be expended for the construction of real property within 12 months after the date the QLICI is made.
The NMTC Relief Notice states that if the last day of the 12-month period for a QALICB to expend QLICI proceeds for the construction of real property falls on or between April 1, 2020 and December 30, 2020, such last day is postponed to December 31, 2020, which means that such proceeds will continue to be treated as a reasonable amount of working capital of the QALICB (and not NQFP) if expended no later than December 31, 2020.
How Manatt Can Help: Manatt professionals are prepared to work with investors, CDEs, and QALICBs regarding the NMTC, including structuring NMTC transactions; complying with NMTC rules, regulations, and guidance; and making use of the COVID-19 relief contained in the NMTC Relief Notice.
For More Information: For more information regarding NMTCs and the NMTC Relief Notice, please contact Megan Christensen, partner, Manatt Tax, at mchristensen@manatt.com or 202.585.6594, or Neil Faden, partner, Corporate and Finance, at nfaden@manatt.com or 212.830.7181.