Form 8874 New Markets Credit

8874

Form
(Rev. December 2012)
Department of the Treasury
Internal Revenue Service

New Markets Credit
▶

OMB No. 1545-1804

▶ Attach to your tax return.
Information about Form 8874 and its instructions is at www.irs.gov/form8874.

Attachment
Sequence No. 127
Identifying number

Name(s) shown on return
(a)
Name and address of the qualified
community development entity (CDE)

(b)
Employer identification
number of CDE

(c)
Date of initial
investment

(d)
Amount of qualified
equity investment

1

(e)
Credit
rate

(f)
Credit ((d) × (e))

%
%
%
%
%
%

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 Form 3800, line 1i
. . . . . . . . . . . . . . . . . . .

For Paperwork Reduction Act Notice, see instructions.

Cat. No. 31663N

2
3
Form

8874 (Rev. 12-2012)

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Form 8874 (Rev. 12-2012)

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

Future Developments
For the latest information about developments related to Form
8874 and its instructions, such as legislation enacted after they
were published, go to www.irs.gov/form8874.

What’s New
The new markets tax credit allocation has been extended for
calendar years through 2013. To find out if the allocation is
extended beyond 2013, go to www.irs.gov/form8874.

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.
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 1i of Form 3800.

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).

Qualified Equity Investment
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 or a non-real estate 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 or a non-real estate
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
equity investment with a completed Form
TIP qualified
8874-A when a qualified equity investment is
acquired.

Exceptions. An equity investment in an entity that otherwise
qualifies as a qualified equity investment or a non-real estate
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).
• 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.

Non-Real Estate Qualified Equity Investment
If a qualified equity investment is designated as a non-real
estate qualified equity investment, then the qualified equity
investment may only satisfy the substantially-all requirement if
the CDE makes qualified low-income community investments
that are directly traceable (including investments made through
one or more CDEs) to non-real estate qualified active lowincome community businesses. The proceeds of a non-real
estate qualified equity investment cannot be used for
transactions involving a qualified active low-income community
business that is not a non-real estate qualified active lowincome community business. See Regulations section
1.45D-1(d) for details about qualified low-income community
investments.

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.

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Form 8874 (Rev. 12-2012)

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 2012 Form 1040 is reported on line 60 (Other
taxes) and the amount on a 2012 Form 1120 is reported on
Schedule J, line 9f (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.
Qualified CDEs must provide taxpayers holding a
equity investment with a completed Form
TIP qualified
8874-B when a recapture event occurs.

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 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
.

.

.

.

.

.

.

.

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. 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.