From Incentive to Impact: What Extended Tax Credits Mean for Community Development Finance

Introduction

In July 2025, H.R.1 (otherwise known as the One Big Beautiful Bill Act) was passed in the United States. Among other things, this legislation expanded three tax credit programs that are designed to spur economic development in disinvested places. Community development financial institutions (CDFIs) have historically participated in all three tax programs: the New Markets Tax Credit (NMTC), the Low-Income Housing Tax Credit (LIHTC), and Opportunity Zones (OZ).

The Federal Reserve's 2025 CDFI Survey asked several questions about respondents' use of federal and state programs, including federal tax incentives. Twenty-two respondents independently noted that expanding one or more of these tax credit programs would help CDFIs support investment and credit access in underserved markets. Another nine respondents supported tax credit incentives generally. This post explores the three tax credit programs that were expanded under H.R.1 and how CDFIs leverage these programs.

New Markets Tax Credit

Originally established in 2000, the New Markets Tax Credit (NMTC) program was designed to spur private investment in distressed or low-income areas. The program is administered through the Treasury Department's CDFI Fund, and the Treasury Department allocates credits to qualified financial intermediaries, or Community Development Entities (CDEs). Investors can make qualified investments in CDEs to earn up to 39 percent of their investment amount as federal income tax credits over a seven-year period. CDEs sell credits to investors and use the proceeds to fund local businesses or housing development projects in low-income areas.

How do CDFIs participate in the NMTC program? Once certified by the Treasury Department's CDFI Fund, CDFIs automatically qualify as CDEs - though they still need to apply for NMTC allocations. Aside from CDFIs, CDEs include entities like local governments, real estate developers, commercial banks, and nonprofits. Out of all types of CDEs, the Urban Institute found that CDFIs and other mission-driven lenders were most likely to receive NMTC allocations from 2001 to 2019. In that period, CDFIs and other mission-driven lenders received 57 percent of total NMTC allocations.

When the 2025 CDFI Survey was fielded in the spring of 2025, 14 survey respondents said that bolstering the NMTC program would improve CDFIs' ability to support economically disadvantaged communities. These respondents tended to be older loan funds (offering mission-driven financing for more than 10 years) that serve both urban and rural places. Almost all of them suggested extending or expanding NMTC, while the remainder suggested keeping NMTC in place.

As of July 2025, the program was permanently written into U.S. tax code. In December 2025, the Treasury Department announced a NMTC allocation of $10 billion, along with some changes to how the funds will be allocated. The $10 billion figure is a record allocation, but it covers both 2024 and 2025. The Treasury Department reported that 45 percent of the allocatees in this round were CDFIs.

Low-Income Housing Tax Credit

Five survey respondents independently referenced the Low-Income Housing Tax Credit (LIHTC) program. LIHTC is a federal tax incentive for developing affordable rental housing. It was originally enacted as part of the 1986 Tax Reform Act. These tax credits are administered through states, which in turn award credits to housing developers. The developers sell the credits to investors to fund their housing projects, though the credits aren't realized until the housing units open to residents.

Developers must build rental housing units, which are income-tested to ensure units are affordable to low-income residents. The size of the credit is larger for new developments versus rehabilitations but also depends on the cost of the development and how many units are rented by low-income residents. However, there is a cap to the subsidy for each state, which is determined on a per capita basis.

Three respondents directly recommended increasing LIHTC allocations, while two others suggested ways to increase CDFIs' ability to engage with the program. One suggested that CDFIs should be allowed to act as intermediaries for programs like LIHTC and NMTC, which would serve as a sustainable source of equity for the financial institutions.

Opportunity Zones

Opportunity Zones (OZs) are meant to stimulate economic development and job creation in areas that have historically struggled with high poverty rates and low median incomes. Like the NMTC program, this is a place-based policy. However, there are some key differences between the two.

The OZ program was created in the 2017 Tax Cuts and Jobs Act and incentivizes investors through deferred capital gains tax. Investors with recent capital gains can invest in Qualified Opportunity Funds (QOFs). The QOFs then invest in low-income census tracts that have been designated as OZs by each state.

With the investment into a QOF, investors can defer tax on their original capital gains and on any additional gains made on the QOF investment itself - if held for at least 10 years. The Urban Institute found that most OZ projects between 2018 and 2020 were real estate transactions. (Others, including the Economic Innovation Group, found significant increases in residential real estate development specifically).

CDFIs can participate in the OZ program in a few different ways. One way is that they can develop a QOF, which would effectively act as the intermediary between investors and the development project. Alternatively, a CDFI could attract investment from a QOF, which could include receiving investment from a QOF and then lending to businesses or developers within the OZ census tract. Another possibility could be the CDFI lending within the OZ - independent of involvement from a QOF. At the time of the survey, only 11 percent of all 2025 survey respondents said they had participated in the OZ program in some way. This included a mix of older and younger institutions - both deposit-taking institutions and not - representing diverse geographic coverage.

In response to an open-ended question about policy recommendations to support community investment, only three respondents mentioned OZs, and none of them explicitly suggested extending the program or making it permanent. One respondent pointed out that, in their experience, they had seen little demand for OZ investment in rural areas.

Changes to the program in July aimed to improve OZ investment in rural areas. Now, OZ investments in rural places are eligible for up to a 30 percent reduction in capital gains tax (compared with up to a 10 percent reduction in nonrural places). Also, to make the program permanent, states will need to redesignate OZs every 10 years.

Conclusion

Three tax credit programs, NMTC, LIHTC, and OZ were expanded in U.S. H.R.1 in July 2025. All three aim to incentivize community development and investment for underinvested places or for low-income residents. CDFIs can and do participate in all three programs to promote economic development within target markets, though usage varies based on each program's structure and required resources.

Several survey respondents said that expanding NMTC would help the CDFI industry grow. Fewer respondents said the same of the LIHTC program, while none independently encouraged expansion of the OZ program. Now that these programs are permanent - and to some degree, changed - the Richmond Fed will continue to monitor how CDFIs leverage these credits to promote local investment and development.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.