Form 8874 New Markets Credit

Form

8874

OMB No. 1545-1804

New Markets Credit

(Rev. January 2007)
Department of the Treasury
Internal Revenue Service

©

Attachment
Sequence No.

Attach to your tax return.

(a)
Name and address of the qualified
community development entity (CDE)

127

Identifying number

Name(s) shown on return
(b)
Employer identification
number of CDE

(c)
Date of initial
investment

(d)
Amount of qualified
equity investment

(e)
Credit
rate

(f)
Credit ((d) 3 (e))

1
%
%
%
%
%
%
2
3

New markets credit from partnerships and S corporations
Add lines 1 and 2. Partnerships and S corporations, report this amount on Schedule K;
all others, report this amount on the applicable line of Form 3800, (e.g., line 1l of the 2006 Form
3800)

2

3

General Instructions

Qualified Equity Investment

Section references are to the Internal Revenue Code unless
otherwise noted.

A qualified equity investment is an interest in a qualified CDE
in the form of stock (other than nonqualified preferred stock) in
a corporation or a capital interest in a partnership that meets
all of the following requirements.
● You acquired the investment solely for cash at its original
issue (or from a taxpayer for whom the investment was a
qualified equity investment). The cash may be from borrowed
funds, including a nonrecourse loan.
● Substantially all (at least 85%) of the cash is used to make
qualified low-income community investments. The 85%
requirement is reduced to 75% for the seventh year of the
7-year credit period.
● The investment was designated as a qualified equity
investment by the CDE on its books and records for purposes
of the new markets credit.
Generally, a qualified CDE can designate an equity
investment as a qualified equity investment only if it applied
for and received a new markets credit allocation and entered
into an allocation agreement with the CDFI Fund before the
equity investment was made.
Qualified CDEs must provide taxpayers holding a
qualified equity investment with a completed Form
TIP
8874-A when a qualified equity investment is
acquired.
Exceptions. An equity investment in an entity that otherwise
qualifies as a qualified equity investment is eligible to be
designated as a qualified equity investment if made prior to an
allocation agreement only if either of the following applies.
● The equity investment was made on or after April 20, 2001,
and the designation of the equity investment as a qualified
equity investment is made for a credit allocation received
under an allocation application submitted to the CDFI Fund no
later than August 29, 2002. If the entity in which the equity
investment is made does not receive an allocation under an
allocation application submitted no later than August 29, 2002,
the equity investment will not be eligible to be designated as a
qualified equity investment. For details, see Regulations
sections 1.45D-1(c)(3)(ii)(A) and 1.45D-1(c)(3)(iii).

What’s New
● The tax liability limit is no longer figured on this form.
Instead, it must be figured on Form 3800, General Business
Credit.
● Taxpayers that are not partnerships or S corporations, and
whose only source of this credit is from those pass-through
entities, are not required to complete or file this form. Instead,
they can report this credit directly on line 1l of Form 3800.
● The IRS will revise the January 2007 version of the form only
when necessary. Continue to use this version for tax years
beginning after 2005 until a new revision is issued.

Purpose of Form
Use Form 8874 to claim the new markets credit for qualified
equity investments made in qualified community development
entities (CDEs). This credit is part of the general business
credit.

Definitions
Qualified CDE
A qualified CDE is a domestic corporation or partnership that
meets the following requirements.
● Its primary mission is serving, or providing investment
capital for, low-income communities or persons.
● It maintains accountability to residents of low-income
communities through their representation on any governing
board or advisory board of the entity.
● It is certified as a qualified CDE by the Community
Development Financial Institutions (CDFI) Fund of the
Department of the Treasury.
Qualified CDEs also include specialized small business
investment companies and community development financial
institutions. See section 45D(c)(2).
For Paperwork Reduction Act Notice, see instructions.

Cat. No. 31663N

Form

8874

(Rev. 1-2007)

Form 8874 (Rev. 1-2007)

● The equity investment was made on or after the date the
CDFI Fund publishes a Notice of Allocation Availability (NOAA)
in the Federal Register, and the designation of the equity
investment as a qualified equity investment is made for a credit
allocation received under an allocation application submitted to
the CDFI Fund under that NOAA. If the entity in which the
equity investment is made does not receive an allocation under
that NOAA, the equity investment will not be eligible to be
designated as a qualified equity investment. For details, see
Regulations sections 1.45D-1(c)(3)(ii)(B) and 1.45D-1(c)(3)(iii).
The maximum amount of equity investments so designated
by the qualified CDE cannot exceed the amount of the
allocation it received from the CDFI Fund. The names and
addresses of qualified CDEs that have received an allocation
for each allocation round and the amount of that allocation is
listed on the CDFI Fund website at www.cdfifund.gov.

How To Figure the Credit
A credit generally is allowed to the holder of the qualified
equity investment on each of 7 credit allowance dates. The
credit allowance dates are the date you make the initial
investment and each of the next 6 anniversary dates. The
credit is equal to the qualified equity investment multiplied by
5% (6% for the 4th through 7th years). However, the credit is
not allowed for a credit allowance date if the investment is not
a qualified equity investment on that date.

Recapture of the Credit
You may have to increase your tax by a credit recapture
amount if at any time within 7 years from the date of the
original issuance of the qualified equity investment:
● The entity ceases to be a qualified CDE,
● Substantially all of the proceeds of the investment cease to
be used to make qualified low-income community
investments, or
● The investment is redeemed or otherwise cashed out by the
entity.
Exception. If a CDE fails to use substantially all of the
proceeds of a qualified equity investment to make qualified
low-income community investments, the CDE may avoid
recapture of the credit if it corrects the failure within 6 months
after the date it becomes aware (or reasonably should have
become aware) of the failure. Only one correction is permitted
for each qualified equity investment during the 7-year credit
period.
See section 45D(g) and Regulations section 1.45D-1(e) for
details, including how to figure the credit recapture amount.
Generally, include the credit recapture amount on the line for
recapture taxes on your income tax return for the year in
which the recapture event occurs. For example, the credit
recapture amount on a 2006 Form 1040 is reported on line 63
(total tax) and the amount on a 2006 Form 1120 is reported on
Schedule J, line 9 (Other taxes).
You are not subject to recapture of the credit solely
because you sell or otherwise dispose of your investment.
However, you cannot claim the credit for any credit allowance
date after the disposition.

TIP

Qualified CDEs must provide taxpayers holding a
qualified equity investment with a completed Form
8874-B when a recapture event occurs.

Page

2

Basis Reduction
You must reduce your basis in your qualified equity
investment by the amount of the new markets credits allowed
(even if part or all of the credit is not allowed for the current
year and is carried forward). However, do not reduce your
basis for purposes of figuring the exclusion of gain for:
● Qualified small business stock under section 1202,
● Certain DC zone assets under section 1400B, or
● Certain qualified community assets under section 1400F.

Additional Information
For more details, see Pub. 954, Tax Incentives for Distressed
Communities, section 45D, Regulations section 1.45D-1, or
www.cdfifund.gov.

Specific Instructions
Line 1
Enter the information requested for each qualified equity
investment held directly by you on a credit allowance date in
the current tax year. In column (e), enter the credit rate. For
the first, second, or third year of the 7-year credit period, enter
“5.” For any later year, enter “6.”
If you need more space, attach a statement showing all the
information requested for each qualified equity investment. On
the last row on line 1, write “See attached” in column (a) and
enter the total of the credit amounts from the attached
statement in column (f).
Paperwork Reduction Act Notice. We ask for the information
on this form to carry out the Internal Revenue laws of the
United States. You are required to give us the information. We
need it to ensure that you are complying with these laws and
to allow us to figure and collect the right amount of tax.
You are not required to provide the information requested
on a form that is subject to the Paperwork Reduction Act
unless the form displays a valid OMB control number. Books
or records relating to a form or its instructions must be
retained as long as their contents may become material in the
administration of any Internal Revenue law. Generally, returns
and return information are confidential, as required by section
6103.
The time needed to complete and file this form will vary
depending on individual circumstances. The estimated burden
for individual taxpayers filing this form is approved under OMB
control number 1545-0074 and is included in the estimates
shown in the instructions for their individual income tax return.
The estimated burden for all other taxpayers who file this form
is shown below.
Recordkeeping

6 hr., 13 min.

Learning about the
law or the form

1 hr., 12 min.

Preparing and sending
the form to the IRS

1 hr., 20 min.

If you have comments concerning the accuracy of these
time estimates or suggestions for making this form simpler,
we would be happy to hear from you. See the instructions of
the tax return with which this form is filed.