Form 8874

Department of the Treasury

Internal Revenue Service

Name(s) shown on return

Cat. No. 31663N Form 8874 (Rev. 1-2007)

Attachment

Sequence No. 127

Identifying number

(e)

Credit

rate

(d)

Amount of qualified

equity investment

(c)

Date of initial

investment

(b)

Employer identification

number of CDE

(a)

Name and address of the qualified

community development entity (CDE)

1

(f)

Credit ((d) 3 (e))

3

%

%

%

3

For Paperwork Reduction Act Notice, see instructions.

2 New markets credit from partnerships and S corporations 2

(Rev. January 2007)

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)

OMB No. 1545-1804 New Markets Credit

© Attach to your tax return.

%

%

%

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 also include specialized small business

investment companies and community development financial

institutions. See section 45D(c)(2).

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).

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 by the CDE on its books and records for purposes

of the new markets credit.

General Instructions

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.

What’s New

Section references are to the Internal Revenue Code unless

otherwise noted.

Purpose of Form

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 CDE

● 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.

Definitions TIP

Qualified CDEs must provide taxpayers holding a

qualified equity investment with a completed Form

8874-A when a qualified equity investment is

acquired.
Form 8874 (Rev. 1-2007) Page 2

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.

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).

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.

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.

● 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).

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.

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.”

Specific Instructions

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).

Additional Information

For more details, see Pub. 954, Tax Incentives for Distressed

Communities, section 45D, Regulations section 1.45D-1, or

www.cdfifund.gov.

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.

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.