BDO Nonprofit Newsletter - Fall 2023 - Cash Benefits for Supporting ESG - New Markets Tax Credit

Sep 19, 2026

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Fall 2023 BDO Nonprofit Standard newsletter discusses how tax credits and incentives can support ESG initiatives, emphasizing the “S” (social) dimension through the New Markets Tax Credit (NMTC). It explains what the NMTC is, who administers it, how CDEs generate tax credits for monetization, and how the program funds projects in low-income communities. It also covers nonprofit funding mechanisms and common challenges in leveraged NMTC structures.

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Pages14

Reading Time5 min

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Cash Benefits for Supporting ESG - New Markets Tax Credit

What is the NMTC?

Nonprofits and the NMTC

The IRS Weighs in on Nonprofit NIL Collectives

Interim NIL policy and IRS conclusion

FALL 2023www.bdo.com/nonprofit THE NEWSLETTER OF THE BDO INSTITUTE FOR NONPROFIT EXCELLENCESM Cash Benefits for Supporting ESG - New Markets Tax Credit By Jesse Tsai, CPA, JD With an increasing focus on environmental, social and governance (ESG) issues,some organizations are seeking ways to fund various ESG initiatives . Tax creditsand incentives have played an important role in subsidizing ESG initiatives, withthe Inflation Reduction Act significantly enhancing their impact on environmentalinvestments . However, the often-overlooked social aspect of ESG can alsobesupported by tax creditsand incentives . The social dimension of ESG focuses on an organization's relationship with society,includingthe well-being of employees andthe communities the organizations operatein . One mechanism that organizations can utilize to fund initiatives supporting localcommunities isthe New MarketsTax Credit (NMTC) . WHAT IS THE NMTC? The NMTC is a federal program established in 2000 to incentivize investment inlow-income communities . Codified under Internal Revenue Code Section 45D, theprogram has been continuously extended through legislative packages . The latestextension provides a $5 billion annual allocation through 2025 . The CDFI Fund, an agency of the U . S . Treasury, administers the program throughcertified community development entities (CDEs) . CDEs use the NMTC allocation togenerate a 39% tax credit, which can be monetized by tax credit investors . CONTENTS Cash Benefits for SupportingESG - New Markets Tax Credit . . . . . 1 The IRS Weighs in on NonprofitNIL Collectives . . . . . . . . . . . . . . . . . . 3 GASB Implementation Guide No .2023-1, Implementation GuidanceUpdate-2023 . . . . . . . . . . . . . . . . . . . . 5 The Evolving Role of CFOs in DrivingESG Initiatives . . . . . . . . . . . . . . . . . . . 7 Are Your Processes Innovativeor Merely Electronic? LeverageTechnology the Right Way . . . . . . . . 8 BDO Professionals in the News . . . . 9 Form 990 Review: What NonprofitBoards Should Look For . . . . . . . . . . 10 STAY CONNECTED to the BDO Nonprofit & Education Practice by following us on our BLOG nonprofitblog.bdo.com on TWITTER@BDONonprofit WEB www.bdo.com/nonprofit 2 NONPROFIT STANDARD – FALL 2023 Using tax credit equity, the CDEs fund projects in low-incomecommunities, often through loans with flexible features suchas below-market interest rates and principal forgiveness . CDEs help the CDFI Fund allocate funds nationwide, carefullyselecting projects that have a significant impact on low-incomecommunities . These projects commonly focus on creating jobs,developing the workforce, providing goods and services to thecommunity, improving healthcare and other community benefits . The NMTC program requires annual reporting of communityoutcomes generated by each project, making it an effectivetool to support the "S" in ESG initiatives . NONPROFITS AND THE NMTC Nonprofit organizations receive a significant portion of NMTCfunding each year . The social mission of nonprofits aligns well with the NMTC program's goal of community development,particularly for underserved populations . NMTC funds often serve as a valuable source of funding for nonprofitstosupplement their capital campaignsand other fundraising efforts . However, nonprofits face challenges in utilizing the leveragedstructure commonly used for NMTC funding . In a leveragedstructure, tax credit investors create an investment fundthat combines their tax credit equity with other financingsources to provide project funding . One challenge nonprofitorganizations face is that the leveraged structure typicallyrequires two taxable entities . To address this, many nonprofitsestablish supporting organizations to facilitate NMTCtransactions . Additionally, securing upfront funding sourcescan create time-value pressure on cash flow, especially fornonprofits that finance their projects

FAQs

What is the New Markets Tax Credit (NMTC) and when was it established?

The NMTC is a federal program established in 2000 to incentivize investment in low-income communities. It is codified under Internal Revenue Code Section 45D and has been continuously extended through legislation.

How do CDEs use NMTC allocation and what does it generate?

Certified community development entities (CDEs) use the NMTC allocation to generate a 39% tax credit. The credit can then be monetized by tax credit investors.

How do nonprofits typically use NMTC financing, and what is a common leveraged-structure challenge?

Nonprofits use NMTC funding to supplement capital campaigns and other fundraising, often through leveraged structures involving tax credit investors and a fund. A key challenge is that the leveraged structure typically requires two taxable entities, so many nonprofits establish supporting organizations to facilitate NMTC transactions.

Sep 19, 2026

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