Tax Credits Overview
Tax Credits are a fundamental part of the development finance toolbox. They are available at the federal and state level, and they are one of the most effective tools to incentivize development. Tax credits are not a deduction, but instead work by directly reducing tax liability. For example, a borrower with a $1,000 tax liability (after deductions are considered) and $100 of tax credits will have a net tax liability of $900. There are tax credit programs targeting many different sectors of development – low-income areas, research and development, housing, clean energy, historic rehabilitation, job creation, film and multimedia, and more. Often times, there are many criteria that must be met in order to receive the credit. In some cases, tax credits can even be sold by developers to make a profit. Overall, tax credits are a versatile and effective development finance tool.
Common Types of Tax Credits
New Markets Tax Credit (NMTC)
The New Markets Tax Credit (NMTC) is designed to stimulate investment in urban, low-income communities. It was first authorized in the Community Renewal Tax Relief Act of 2000, and has been repeatedly reauthorized since then. This program provides investors with a 39% tax credit of their total Qualified Equity Investment in a Community Development Entity (CDE), stretched over a seven year period. From 2003 to 2015, NMTC investments generated between $42 billion and $80 billion in financing for project.
Historic Tax Credit (HTC)
The Historic Tax Credit offers a 20% tax credit to projects that are rehabilitating certified historic structures. The historic structure must be certified by the National Park Service, and the work must comply with the Secretary of the Interior’s Standards for Rehabilitation. This program has helped complete the capital stack for 44,000 historic rehabilitation projects. It has also incentivized over $96 billion to historic communities since 1976, making it one of the most successful revitalization programs available.
Low-Income Housing Tax Credit (LIHTC)
This program, first authorized by the Tax Reform Act of 1986, allows state housing credit agencies to award affordable housing developers with 4% and 9% federal tax credits. The credit is designed to make it feasible for property owners to offer affordable rents and incentivize investment in low-income housing. National banks can also make LIHTC investments by directly funding affordable housing projects.
Renewable Electricity Production Tax Credit (PTC)
This credit – officially called the Renewal Electricity Production Tax Credit (PTC) - was originally created in 1992. It offers an inflation-adjusted tax credit for every kilowatt-hour of electricity generated by qualified energy resources. The credit is granted to the taxpayer that sells said energy to consumers, and the credit lasts for 10 years after the generation facility first becomes operational. These corporate tax credits are available for solar, biomass, geothermal, and wind energy generation projects.
Investment Tax Credit
The Business Energy Investment Tax Credit (commonly called the ITC) is designed to spur investment in renewable energy systems. It provides a 30% corporate tax credit to taxpayers constructing solar energy projects, wind energy, and fuel cell projects. For geothermal, micro-turbines, as well as combined heat and power (CHP) projects, the credit is 10%. Congress has revised the credit several times over its history, most recently in 2018.
State Tax Credits
Each state has its own suite of tax credit programs. States often offer companion historic tax credit programs, tax credits designed to incentivize job creation, and tax credits for small businesses. Some states also offer programs similar to the federal low-income housing tax credit. The authorizing legislation for each state program can vary widely. In some cases, state level programs can be used in conjunction with their federal counterparts.
NMTC Example- Northland Central in Buffalo, NY
The National Trust Community Investment Corporation (NTCIC) was awarded $60 million in New Markets Tax Credits from the CDFI Fund for investing in low-income communities. NTCIC used a significant portion of this award for Northland Central, a manufacturing facility in Buffalo, New York. The project created mixed-use lab/training, industrial, and office space with focus on providing advanced energy and manufacturing jobs for underrepresented low-income groups. The NMTC award helped complete the capital stack for the project.
HTC and LIHTC Example – Houma Elementary School in Terrebonne Parish, LA
Houma Elementary School was originally built in 1931 in Terrebonne Parish, Louisiana. The school closed in 1970, and until 2014 was the location of school district administrative offices. The Parish then acquired the building and selected a developers’ RFP to redevelop the property into 103 units of housing for mixed-income seniors. Thanks to roughly $2 million in both federal and state historic tax credit equity, and $7.5 million in low-income housing tax credit equity, the developer was able to complete the $19.7 million rehabilitation project in 2017.
Innovative state tax credit program example– NJEDA’s Angel Investor Tax Credit
The New Jersey Economic Development Authority (NJEDA) offers an Angel Investor Tax Credit for investments in emerging technology businesses. The credit is for 10% of the investment made, up to $500,000 of maximum allowed credit. The investment must be made in a New Jersey qualified emerging technology business with less than 225 full-time employees, and 75% of those employees must work in the state. Thanks to the tax credit program, investors infused $39 million into New Jersey technology companies in the first half of 2018 – making the average investment around $650,000.
Tax Credits Resource Center
View All Tax Credit Resouces
Case Studies on Tax Credits