The US Joint Committee on Taxation (JCT) published the Tax Incentives for Economic Development and Financing, which explains the present-law tax incentives for qualified opportunity zones, the new markets tax credit, the rehabilitation credit for certified historic structures, and present and prior law relating to tax-exempt financing.

This document was released after the Senate Committee on Finance scheduled a public hearing on 30 July, 2024, titled “Tax Tools for Local Economic Development.”

Qualified opportunity zones and infrastructure

The qualified opportunity zone rules require investors to hold equity in QOZBP, tangible property in the qualified opportunity zone. As such, the rules may be used to finance investments in property such as real estate. However, the rules impose several restrictions that may make broader infrastructure projects less feasible.

An additional rule mandates that less than 5% of the average of the aggregate adjusted basis of the property of the qualified opportunity zone business be attributable to the nonqualified financial property. This limits qualified opportunity funds from investing through debt; unlike new markets tax credit investments, which have traditionally been made in the form of loans, financial intermediaries are effectively prohibited by the opportunity zone rules.

Another rule requires that at least 50% of the total gross income of the qualified opportunity zone business be derived from the active conduct of business in the qualified opportunity zone. This requirement may exclude non-revenue generating public infrastructure.

Finally, the requirement that investments be deployed within a certain timeframe may prevent using the benefit for infrastructure projects that are either too far into their development timeline or too early in the planning process.

New markets tax credit

The New Markets Tax Credit (“NMTC”) is a geographically based tax credit programme. An investor may claim a tax credit for seven years for a qualified equity investment in a qualified community development entity (“CDE”).

A qualified CDE is any domestic corporation or partnership: (1) whose primary mission is serving or providing investment capital for low-income communities or low-income persons; (2) that maintains accountability to residents of low-income communities by their representation on any governing board of or any advisory board to the CDE; and (3) that is certified by the Secretary as being a qualified CDE.

The qualified CDE designates equity investments as qualified equity investments, rendering the investor eligible to receive tax credits.9 The qualified CDE can only designate up to an amount allocated by the Community Development Financial Institutions Fund (“CDFI Fund”) within the Treasury. The CDFI Fund allocates amounts to qualified CDEs through a competitive application process.

Rehabilitation credit for certified historic structures

A 20% tax credit is provided for qualified rehabilitation expenditures with respect to a certified historic structure that has been substantially rehabilitated, for which depreciation or amortisation is allowable, and that meets other requirements to be a qualified rehabilitated building. The credit is generally allowable ratably in each taxable year over the five-year period beginning in the taxable year in which the qualified rehabilitated building is placed in service, for amounts paid or incurred after 31 December, 2017.

The basis of the property is reduced by the amount of the rehabilitation credit. A certified historic structure means any building that is listed in the National Register, or that is located in a registered historic district and is certified by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance to the district.

Qualified rehabilitation expenditures with respect to residential property generally do not include any expenditure in connection with the rehabilitation of the portion of a building that is (or is expected to be) leased to a tax-exempt entity.

Tax-exempt financing

Interest paid on bonds issued by State and local governments generally is excluded from gross income for Federal income tax purposes. Because of the income exclusion, investors generally are willing to accept a lower interest rate on tax-exempt bonds than they might otherwise accept on a taxable investment. This, in turn, lowers the borrowing costs for the beneficiaries of such financing.

Bonds issued by State and local governments may be classified as either governmental bonds or private activity bonds. Governmental bonds are bonds the proceeds of which are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for interest paid on State and local bonds does not apply to private activity bonds unless the bonds are issued for certain permitted purposes (“qualified private activity bonds”) and other Code requirements are met.