Printable Form 2026

IRS Form 8874 – New Markets Credit

IRS Form 8874 – New Markets Credit – In today’s economic landscape, incentives like tax credits play a crucial role in encouraging investments in underserved communities. One such incentive is the New Markets Tax Credit (NMTC), claimed using IRS Form 8874. This form allows eligible taxpayers to reduce their federal tax liability by investing in qualified community development entities (CDEs) that support low-income areas. Whether you’re an individual investor, a business, or a pass-through entity, understanding Form 8874 can help maximize your tax benefits while contributing to community development. In this comprehensive guide, we’ll explore the purpose of the form, eligibility requirements, calculation methods, filing process, and more.

What Is the New Markets Tax Credit?

The New Markets Tax Credit is a federal program designed to stimulate economic growth in distressed communities by attracting private investment. Established under Section 45D of the Internal Revenue Code, the NMTC provides a credit against federal income taxes for taxpayers who make qualified equity investments in CDEs. These entities, certified by the Community Development Financial Institutions (CDFI) Fund under the U.S. Department of the Treasury, use the investments to finance projects in low-income communities, such as real estate developments, businesses, and nonprofits.

The credit is part of the general business credit and is claimed over a seven-year period. It aims to bridge the gap in financing for projects in areas with high poverty rates or low median incomes, ultimately fostering job creation and community revitalization. For example, investments might fund affordable housing, healthcare facilities, or small business expansions in qualifying zones.

Eligibility for the New Markets Credit and Form 8874

To claim the NMTC using Form 8874, you must meet specific criteria:

  • Qualified Equity Investment (QEI): You need to make a cash investment in a CDE that is designated as a QEI. The CDE must use substantially all (at least 85%) of the proceeds for qualified low-income community investments (QLICIs), such as loans or equity in businesses operating in low-income areas.
  • Who Can Claim It: Individual taxpayers, corporations, partnerships, and S corporations that hold QEIs directly or through pass-through entities are eligible. If your only source of the credit is from a pass-through entity, you may not need to file Form 8874 separately—instead, report it directly on Form 3800.
  • CDE Certification: The investment must be in a CDFI Fund-certified CDE. The CDE will provide you with Form 8874-A, Notice of Qualified Equity Investment, confirming the investment’s eligibility and detailing the allowable credit amounts.
  • Timing: Investments must align with allocation agreements from the CDFI Fund, and QEIs cannot exceed the CDE’s allocated amount. Note that the NMTC program allocations have been extended through calendar year 2025, so investments made by then can qualify for credits claimed in subsequent years.

If you’re unsure about eligibility, consult the CDFI Fund’s website or a tax professional, as geographic and income-based qualifications for low-income communities are strictly defined.

How to Calculate the New Markets Credit?

Calculating the credit on Form 8874 is straightforward but requires accurate details from your investment:

  1. Identify the Credit Allowance Dates: The credit is claimed on the initial investment date and each of the six subsequent anniversary dates—a total of seven years.
  2. Apply the Credit Rate: Multiply the QEI amount by:
    • 5% for the first three years.
    • 6% for the remaining four years.
  3. Total Credit: Sum the annual credits. For instance, a $1 million QEI would yield $50,000 in the first year (5%) and $60,000 in the fourth year (6%).
  4. Basis Reduction: Reduce your basis in the investment by the credit amount claimed each year, which affects future gain or loss calculations.

Use line 1 of Form 8874 to list each investment’s details, including the CDE’s name, EIN, investment date, amount, and credit rate. If you have multiple investments, attach a statement. The total from line 3 flows to Form 3800, Part III, line 1i.

Step-by-Step Guide to Filing IRS Form 8874

Filing Form 8874 ensures you properly claim the NMTC:

  1. Gather Documentation: Obtain Form 8874-A from the CDE, which includes the investment amount and allowable credits.
  2. Complete the Form:
    • Enter CDE and investment details on line 1.
    • Calculate the credit on line 2.
    • Report the total on line 3.
  3. Attach to Your Return: Partnerships and S corporations report on Schedule K; others attach to their income tax return (e.g., Form 1040 or 1120).
  4. Electronic Filing: Use tax software like TaxSlayer Pro for seamless integration with Form 3800.
  5. Deadlines: File by your tax return due date, including extensions.

For the latest form version (revised November 2021), download it from the IRS website.

Recapture Events and Compliance Considerations

While the NMTC offers significant benefits, noncompliance can trigger recapture:

  • Recapture Triggers: Occurs if the CDE ceases to qualify, investment proceeds aren’t used properly, or the investment is redeemed within seven years.
  • Consequences: Recaptured amounts are added back as tax liability, plus interest. The CDE must notify you via Form 8874-B within 60 days of a recapture event.
  • Avoidance: Correct certain issues (e.g., improper use of proceeds) within six months to prevent recapture.

Regular audits and compliance checks are essential, as the IRS may review related returns.

Recent Updates to the New Markets Tax Credit Program

As of 2026, the NMTC allocations remain extended through 2025, with no announced extensions beyond that date based on current information. Investors with QEIs from prior years can continue claiming credits on anniversary dates. Stay informed via IRS publications or the CDFI Fund for any legislative changes that could impact future allocations.

Frequently Asked Questions About IRS Form 8874

  • What if I have multiple investments? List them on line 1 or attach a statement with totals.
  • Is the credit refundable? No, it’s nonrefundable but can be carried forward as part of the general business credit.
  • Can states offer similar credits? Yes, some states like Nebraska have complementary programs, such as the New Markets Job Growth Investment Tax Credit.
  • Where can I find more resources? Visit IRS.gov for forms and instructions, or consult a tax advisor.

Conclusion: Leveraging Form 8874 for Tax Savings and Community Impact

IRS Form 8874 provides a powerful tool for claiming the New Markets Credit, offering up to 39% of your qualified investment as a tax credit over seven years. By investing in CDEs, you not only reduce your tax burden but also support vital community projects. Ensure compliance by using official IRS resources and professional guidance. If you’re considering an investment, act soon to take advantage of available allocations. For the most current details, refer to the IRS website or speak with a certified tax professional.