IRS Clarifies Qualified Income Under Targeted Population Standard
By Caitlin Jones
3 min read
Tax Credit Advisor, May 2009: An IRS private letter ruling (200910024) clarifies the types of income a nonprofit health care provider can count toward qualifying the patients it serves as a low-income “targeted population” under the federal new markets tax credit (NMTC) program.
The ruling was released 3/6/09. Private letter rulings may only be relied upon legally by the party that requested them, but reveal the Service’s interpretation of specific federal tax law requirements.
The ruling request addressed a situation where a health care services provider, a nonprofit corporation, was about to build a new clinic to expand its operations. The nonprofit’s patients primarily make less than 200% of the federal poverty income limit. Its income sources have included direct payments from patients, insurance reimbursement, grants, and other types. One annual federal grant helps cover non-reimbursed costs for health care services provided to uninsured patients.
The taxpayer originally sought to qualify for a construction loan for the new clinic building from a community development entity. But the site wasn’t located in a census tract that qualifies as a geographic low-income community under the NMTC program. The taxpayer, though, believed that because it provides health care services to low-income persons, the health care business in the new clinic building should qualify as a qualified active low-income community business (QALICB) under the NMTC program that serves a low-income targeted population.
To qualify as a QALICB under the NMTC program, at least 50% of the entity’s gross income must be derived from the active conduct of a qualified business with any low-income community. A low-income community is a census tract in which the median family income qualifies as low-income.
IRS Notice 2006-60 expanded the definition of a low-income community to add “targeted populations.” A business located outside a low-income census tract can qualify as a QALICB if it serves a targeted population. Targeted populations are individuals, or an identifiable group of individuals, including an Indian tribe, who are (1) low-income persons, or (2) individuals who otherwise lack adequate access to loans or equity investments.
Section 3.03(2)(a)(i) of Notice 2006-60 provides that a QALICB for low-income targeted populations is a corporation or partnership, engaged in the active conduct of a qualified business, in which at least 50% of the entity’s total gross income for any taxable year is “derived from” sales, rentals, services or other transactions with low-income persons.
In its letter ruling, the Service held that payments received directly by the taxpayer from low-income patients, and other specific amounts received by the taxpayer on behalf of low-income patients, will be treated as sales, rentals, services or other transactions with low-income persons, provided these other payments and contributions are provided on behalf of the patients individually or as a class of individuals. The specific types of income received by the taxpayer include direct payments from patients; federal, state, or local grants; charitable donations; in-kind contributions; collected fees, insurance reimbursements, and other sources of incomes provided on behalf of low-income patients.
