Navigating the IRA and NMTCs: Key considerations for financial services organizations

NMTCs are federal income tax credits used to encourage private investment in the commercial development of low-income communities across the United States. The NMTC program has been around since 2001 and nearly $76 billion in allocation has been awarded. The program was approved for five years but has since received several extensions. In 2020, legislation extended the NMTC program for five more years and raised the annual allocation to $5 billion. This program has strong bipartisan support, and legislation has been introduced to make the program permanent. The NMTC program provides tax credits for investment into operating businesses and real estate development projects located in qualifying communities by certified Community Development Entities (CDEs). The majority of NMTCs are manufacturing/industrial, healthcare and community facility projects, but they can be used to fund many business types and they are suitable to offset state insurance premium taxes.

NMTC transactions drive positive community impacts intended to spur investments and revitalization by:

• Creating and retaining quality and accessible jobs and implementing career ladder training and advancement 
• Providing greater access to commercial goods and services, like healthier food options and retail stores 
• Providing greater access to community facilities like healthcare facilities, multi-service community facilities and schools 

NMTC program benefits include economic benefits to the recipient in the form of additional capital to fund projects, low cost of capital, below-market interest rates and flexible loan teams. NMTC benefits don’t typically need to repaid. They also have great community benefits and create additional economic development opportunities for the local community. Because of the current NMTCs that are available, the conditions are especially favorable to new investors entering the market. Certain states are even offering state-level NMTC programs, which can allow some organizations to reduce the premium tax paid to the state. For a more in-depth look at New Markets Tax Credits and how implementing them into your tax strategy can benefit both your organization and low-income communities, use our interactive mapping tool.

Signed into law on Aug. 16, 2022, the Inflation Reduction Act (IRA) includes the largest energy incentive effort in U.S. history. It builds on the energy initiatives included in 2009’s American Reinvestment Recovery Act, creating an environment where many energy-related projects become significantly more attractive to a growing list of entities than in the past. The Act provides for a direct offset to federal tax liability as a tax credit. There are more than 70 separate tax credits in the IRA, and many of these credits and incentives are entitlements, meaning if your project meets specific criteria you are entitled to the tax credit. Eligible IRA tax credit energy projects include:

• Wind, solar PV electricity, solar hot water
• Electric vehicles and charging stations
• Biomass, combined heat and power and geothermal energy
• Renewable/low-carbon fuels
• Electric battery storage, thermal energy storage, carbon capture

The IRA provisions aim to help reduce greenhouse gas emissions across the range of fuel types, energy producers and energy users. It creates the ability to transfer credits or receive direct payments from the Internal Revenue Service (IRS). There is also meaningful emphasis on jobs and earnings growth, domestic content and environmental justice. Most credits are effectively good through 2032 – the longest U.S. “energy policy” timeframe ever.

Learn more about Baker Tilly’s IRA approach.

Taking a comprehensive view of incentive opportunities can provide value to your organization in both the short and long term. Both the IRA and NMTCs offer unique advantages that can bolster financial performance, foster community development and enhance overall business sustainability. Tax credits and incentives can be a crucial part of a project’s funding structure and an opportunity for your organization to maximize tax cost savings, reduce your effective rate and enhance your reputation. Even if you haven’t started or are still implementing an updated tax strategy, embracing government tax credits and incentives will be extremely beneficial and will have a direct impact on your organization.  

The IRA provides for a direct offset to federal tax liability in the form of a tax credit, which enabling all entities to utilize this legislation regardless of tax status. Three ways these credits bring value to projects include: 

• The owner can simply use the tax credit against their own tax liability, in most cases back three years and forward 22 years 
• If the owner doesn’t have tax liability or taxable income, they can now sell certain credits to another taxpayer (transferability) 
• Tax-exempt owners can receive a “direct payment" in the form of cash refund from the IRS. These owners include housing authorities, state and local governments, school districts, not-for-profits, tribes and others.

Despite what many believe, along with the IRA any size c-corporation with sufficient, relatively stable tax liability can be a NMTC investor. Nearly all financial services organizations can utilize NMTCs to diversify investment portfolios, catalyze economic development, increase public image and build stronger community relationships.

Effective tax planning involves integrating tax credits and incentives seamlessly into your organization’s overall tax strategy. Assess how these tax credits and other incentives align with your business objectives, risk appetite and long-term financial goals. Keeping these factors in mind will ensure that any tax benefits your organization receives will complement strategic initiatives and contribute to sustainable growth. Developing a comprehensive tax strategy that incorporates various credits and incentives requires a holistic approach. It involves aligning investment decisions, asset allocation and operational tactics to maximize tax advantages while mitigating risks and maintaining regulatory compliance.

Navigating tax credits and incentives also entails rigorous compliance and reporting obligations. Financial services organizations must adhere to specific guidelines, documentation requirements and reporting deadlines associated with claiming tax benefits. Non-compliance can lead to penalties and reputational risks, underscoring the importance of robust internal controls and accurate record-keeping. By leveraging these opportunities effectively, financial services organizations can not only optimize their financial performance but also play a pivotal role in driving inclusive economic prosperity and resilience across communities. You can stand to gain significant advantages by strategically leveraging tax credits and incentives such as the IRA and NMTCs. However, success hinges on a thorough understanding of eligibility criteria, proactive planning, seamless integration into overall strategy and diligent compliance practices.