Form 8874

What is IRS Form 8874?

The IRS Form 8874 is the document required by the IRS to claim the New Markets Tax Credit. This form, along with its instructions, can be found on the official IRS website. Its primary function is to help taxpayers detail their claim for the NMTC.

Businesses investing in low-income communities may be eligible for this credit, which aims to stimulate economic growth and development in these areas. By offering a tax incentive, the IRS encourages businesses to invest in these communities, leading to job creation and improving local economies.

The Importance of IRS Form 8874

Filling out the IRS Form 8874 is essential for entities seeking to claim the New Markets Tax Credit. Through this form, businesses can outline the credit they are eligible for and reduce their tax liabilities accordingly.

Remember, this form is only useful to those who have made qualified equity investments in a Community Development Entity (CDE) and received a qualifying notice of allocation for the NMTC. If these conditions are not met, you cannot use Form 8874.

How IRS Form 8874 Connects to the New Markets Tax Credit

The New Markets Tax Credit is a unique initiative by the U.S. government, aimed at fostering business growth and development in distressed communities. IRS Form 8874 is the vehicle through which businesses can claim this credit.

Under this credit, taxpayers are allowed a tax reduction for a portion of their investment made to a qualified CDE, which then uses the capital to finance businesses in low-income communities. The total credit is claimed over a period of seven years, starting with the year in which the qualified equity investment was made.

IRS Form 8874 is used to compute and claim this credit. The form includes sections to detail the investment, the year of the credit, and the amount to be claimed. It provides a systematic way for businesses to claim the New Markets Tax Credit and helps the IRS track and regulate these credits.

How To Fill Out Form 8874

Step 1: Fill in the Initial Information

Start by inputting your name and the tax identification number at the top of the form.

Step 2: List Your Qualified Equity Investments

Line 1a requires you to list the qualified equity investments made during the tax year. You'll need to provide the name and Employer Identification Number (EIN) of the CDE, as well as the date of the investment and the amount.

Step 3: Compute the Credit

Next, calculate the credit for each investment listed on line 1a. The credit rate is 5% for the first three years and 6% for the next four years. Multiply the investment amount by the credit rate to find the credit for each investment. Then, add them together and enter the total credit in line 1b.

Step 4: Claim Prior Year Deferred Credit

If you have a deferred credit from a previous year's investment, you'll claim it in line 2. Add the credit from line 2 to the total credit computed in step 4 (line 1b), and enter this sum in line 3.

Step 5: Compute the Tax Liability Limit

In lines 4 through 8, you'll calculate the limit on your tax liability. This involves figuring your tentative minimum tax and adding any credit for prior year minimum tax.

Step 6: Claim Your Credit

Finally, compare the numbers from line 3 (credit from step 5) and line 8 (limit from step 6). Enter the smaller of the two numbers in line 9. This is the NMTC you're claiming for the current year.