Form 8874 – New Markets Tax Credit Guide

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From my side of the desk, Form 8874 rarely surfaces until a client forwards a notice from a Community Development Entity and asks why a K-1 mentions a credit they have never heard of. One April a partner dropped a stack of those notices on me, certain the full 39% had landed in year one. It had not, and resetting that expectation took longer than the return.

That conversation is why I wrote this guide. Below I walk through what the New Markets Tax Credit actually does, who files Form 8874 versus who reports straight on Form 3800, the seven-year rate schedule, the recapture events worth losing sleep over, and the documentation that keeps a review moving. Quick rule you can copy into your SOP: read the CDE notice before you touch the software.

Key Takeaways

• You use Form 8874 to claim the New Markets Tax Credit when you hold a Qualified Equity Investment in a certified Community Development Entity. The credit is part of the general business credit and flows to Form 3800.
• The rate is 39% over seven years, split 5% in years 1 to 3 and 6% in years 4 to 7. Claim it on each credit allowance date, usually the investment anniversary (there are seven credit allowance dates in total: the date of the initial investment plus the next six anniversaries, not seven anniversaries after the investment).
• If your only source is a pass‑through K‑1, you typically report the credit on Form 3800 and may not need to file Form 8874 separately. Confirm per your facts and the software you use.
• Watch recapture. It can apply if the CDE loses status, your investment is redeemed, or proceeds stop funding qualified uses. A limited six‑month cure can apply once per investment.
• Keep your documentation tight, including the CDE notice, often Form 8874‑A, and any K‑1 attachments.

What Form 8874 Does, And Who Should File It

Form 8874 is the IRS form you complete to calculate and claim the New Markets Tax Credit from a qualified equity investment in a certified Community Development Entity. It documents the CDE, the investment date and amount, the applicable annual percentage, and whether the activity is passive or nonpassive. The form then feeds the result to Form 3800 under the general business credit limits on your return.

Not every taxpayer files Form 8874. If an individual or business only receives the NMTC via a Schedule K‑1 from a partnership or S corporation, standard IRS guidance and common software workflows direct you to report it on Form 3800. Your facts and software controls still matter, so follow the K‑1 instructions and your product’s prompts.

The Seven‑Year Credit Schedule At A Glance

Here is the statutory schedule you will apply each year you are eligible.

Year of credit period	Percentage	Cumulative total
1	5%	5%
2	5%	10%
3	5%	15%
4	6%	21%
5	6%	27%
6	6%	33%
7	6%	39%

These rates are set in section 45D and are still current for the 2025 filing season.

Basis Reduction You Should Not Miss

When you claim the NMTC, you must reduce the basis of the qualified equity investment by the credit amount allowed, even if part or all of that credit is not allowed in the current year and carries forward. Teams often forget to note this in workpapers, which later complicates exit or allocation discussions. Capture the basis adjustment at the same time you record the year’s percentage so you do not create a review surprise.

The “What, How, Wow” Summary

• What: Form 8874 calculates the New Markets Tax Credit on your qualified equity investment and routes it into your general business credit on Form 3800.
• How: Enter the CDE’s legal name, address, EIN, initial investment date, your investment amount, the correct annual rate, and passive status. Attach pass‑through amounts per K‑1 and align totals to Form 3800.
• Wow: Add controls that catch recapture risks early, track the one‑time six‑month cure window, and standardize file naming for faster multi‑layer review. These small steps save partner time and protect margins.

Why firms stumble on Form 8874

You likely do not struggle for lack of clients. You struggle when delivery bottlenecks hit, like unclear ownership of rate years, missing CDE notices, or inconsistent passive status calls. That creates slow reviews, deadline stress, and margin drag. A simple checklist, plus standardized workpapers, will keep 8874 moving smoothly and free partners to focus on advisory and client conversations.

Step‑By‑Step, Completing Form 8874 In Tax Software

Below is a concise workflow many teams use in TaxSlayer Pro. The menu names might vary slightly between desktop and ProWeb, yet the path is consistent. Always confirm the current year’s product guide.

Start the credit and route it to Form 3800

• Open the 1040 return, then go to Credits, then General Business Credit, then Current Year General Business Credits, then select Form 8874. This ensures the NMTC will land on Form 3800.

Shortcut reminder From the 1040 main menu, choose Credits, then Form 3800, then Current Year, then Form 8874, then New Markets Credit.

Create a record for each CDE investment

For each CDE, enter:

• Legal name, full address, and EIN.
• Initial qualified equity investment date.
• Investment amount tied to that QEI.
• Annual rate for the current credit year, 5% for years 1 to 3, 6% for years 4 to 7.
• Passive or nonpassive classification. These entries sync into the Form 3800 framework.

Add pass‑through credits from K‑1s

If the credit comes through a pass‑through, click New in the pass‑through area, enter the entity’s name and EIN, then key the credit amount exactly as shown on the K‑1. Mark passive or nonpassive. Retain the K‑1 and any attached statements that identify the qualified equity investment and the investment date.

Carrybacks and carryforwards

If applicable, enter carrybacks or carryforwards within the same 8874 flow so the totals reconcile to Form 3800. Use your 3800 detail schedules to confirm ordering and limitation impacts.

Recording recapture, when required

If a recapture event occurs, record the recapture tax in the Other Taxes section of your software, typically under Recapture of Other Credits, then select New Markets Credit recapture. This mirrors e‑CFR guidance to include the NMTC recapture on the line for recapture taxes and label it accordingly.

Required CDE Information You Will Need

Keep a standard intake list so your preparer is never hunting for basics.

• CDE legal name and complete mailing address.
• CDE EIN.
• Initial QEI date.
• QEI amount.
• Current year credit rate and year of the seven‑year period.
• Passive or nonpassive status supporting memo.
• The CDE’s notice of qualified equity investment, often Form 8874‑A.

Consistency matters. If you have multiple CDEs, repeat these fields with the same naming logic and tie totals back to the 8874 lines and Form 3800 detail. This avoids mismatches during review.

Documentation You Should Keep On File

• Form 8874‑A or equivalent CDE notice for each investment.
• The original subscription document or purchase confirmation.
• Annual allocation schedules and correspondence from the CDE.
• For pass‑throughs, the Schedule K‑1 and any statements that identify the QEI, credit year, and allocation.
• A workpaper that shows year‑by‑year credit percentages and the basis reduction applied.

Quick quality check Before routing to review, verify the anniversary date, confirm which year of the seven‑year cycle you are in, and re‑compute the percentage off the QEI amount. That three‑point check catches most mismatches.

Common Pitfalls We See, And How To Avoid Them

Picking the wrong year of the seven‑year cycle, which produces an incorrect 5% or 6% calculation. Tie every 8874 to a simple year tracker keyed off the initial QEI date.

Forgetting basis reduction in the investment workpaper. Add a standing line for basis change each year you claim the credit.

Treating a K‑1 NMTC like a direct CDE entry. Many filers should route K‑1 credits straight to the 3800 schedule per software instructions.

Not documenting passive status. Reviewers will ask, so log the rationale once and reuse it.

Waiting to research recapture until there is a problem. Train staff on the three recapture triggers and the one‑time six‑month cure so they know when to escalate.

Where Accountably can help If you are buried in production and review queues, structured SOPs, standardized workpapers, and a multi‑layer review process reduce rework and partner time. Our teams are trained on QuickBooks, Xero, UltraTax, CCH Axcess, Lacerte, Drake, Karbon, TaxDome, and Suralink, and we operate inside your templates with clear checklists and SLAs. Use us when you need disciplined delivery, not resumes.

Recapture Rules You Must Monitor

Recapture can increase your tax for the year of the event. It applies if, within seven years of the original issue date, the CDE ceases to qualify, the proceeds cease to be used for qualified low‑income community investments, or the investment is redeemed or cashed out. Note that these are entity-side events: selling or otherwise disposing of your own investment does not trigger recapture of credits already claimed, though it does end your ability to claim the credit for any allowance date after the disposition. The recapture amount equals the prior credits that would not have been allowed, plus underpayment interest. You report the increase as a recapture tax on your return and label it for NMTC.

The limited cure exception

There is a narrow exception. If “substantially all” of the proceeds fall out of compliance, the CDE may avoid recapture by fixing the failure within six months of when it knew, or should have known, about the failure. This cure can be used only once per qualified equity investment during the seven‑year period, so treat it as a safety valve, not a plan. Document dates and communications when you rely on it.

A Simple Review Checklist For Partners

• Confirm the anniversary date and year number in the seven‑year cycle, then confirm the correct 5% or 6% rate.
• Verify that the 8874 totals flow to Form 3800 and that carryforwards or K‑1 amounts reconcile to detail schedules.
• Check for basis reduction entries tied to the credit allowed.
• Look for recapture indicators, including CDE communications about status changes or redeptions. If yes, route to recapture workflow and label the tax properly.
• Ensure the CDE notice, often 8874‑A, is in the file.

Final Notes For 2025 Filings

As of January 23, 2025, the IRS page for Form 8874 confirms the purpose and related products, and the seven‑year 39% schedule remains the law in section 45D, though the new markets credit allocation authority is currently authorized only through calendar year 2025, and whether the CDFI Fund makes new allocations after 2025 depends on future legislation (allocations already issued keep generating credits over their full seven-year periods). Use current Form 3800 instructions for limitation computation and breakdown schedules. When in doubt, document your assumptions in the workpapers.

Common Mistakes We See Every Season

The same handful of errors come back every season, and most trace to treating Form 8874 like a one-line credit instead of a seven-year schedule. Here are the ones my team flags most often.

Reusable Checklists

These are copy-paste ready for your firm SOPs. Drop each block into your workpaper template and check items off as you go.

Keep 8874 Season From Stalling

Form 8874 is not a one-and-done filing. Each qualified equity investment carries seven credit allowance dates and a seven-year recapture window, so a single client can generate review work every spring for most of a decade. The IRS pegs recordkeeping alone at more than six hours per filer, with over an hour each to learn the form and to prepare and send it (Form 8874 Paperwork Reduction Act estimates), and that is before anyone reconciles a CDE notice.

The stall point is almost always process, not difficulty. When the schedule lives in someone's head instead of a workpaper, the year-four rate change and the substantially-all test slip, and recapture exposure builds quietly.

• Map all seven credit allowance dates per investment so the 5% rate flips to 6% at year four without anyone guessing.
• Reconcile line 1, column (f) to each CDE notice and confirm column (e) carries the bare integer 5 or 6.
• Route pass-through K-1 credits to Form 3800, Part III, line 1i, and confirm whether a standalone Form 8874 is required at all.
• Monitor the substantially-all test (85% in years 1 to 6, 75% in year 7) and flag the one-time six-month cure window the moment a CDE reports a failure.
• Log basis reductions for credits allowed, including carryforwards, so each investment's basis stays right.

This is the kind of repeatable, multi-year monitoring that runs well on documented SOPs and a structured review layer. Accountably builds that structure into our tax services, so the schedule, the reconciliations, and the recapture watch happen on time without burning senior review hours.

FAQs

What is Form 8874, in plain English?

It is the form you file to claim the New Markets Tax Credit from a qualified equity investment in a certified Community Development Entity. It calculates the year’s percentage and feeds the result to Form 3800 under the general business credit rules.

Do individuals ever file Form 8874?

Sometimes, yes, if they invested directly in a CDE. If the only source is a pass‑through K‑1, many filers report the amount directly on Form 3800 per software instructions, rather than filing 8874. Check the K‑1 and your software prompts.

What are Forms 8874‑A and 8874‑B?

A CDE uses Form 8874‑A to notify you that your original issue investment qualifies for NMTC. Form 8874‑B is used to notify of a recapture event. Keep these notices in your file to support your return and monitoring.

Is there really a cure for recapture risk?

There is a limited cure if “substantially all” of the proceeds fall out of qualifying use, and the CDE fixes the failure within six months of awareness. It can only be used once per QEI. Build a calendar reminder for that six‑month window.

What is Form 8962 used for?

Form 8962 reconciles advance payments of the Premium Tax Credit with your allowable credit based on Form 1095‑A. It is unrelated to the New Markets Credit, yet it often appears in the same software sections. Keep workflows separate to avoid mix‑ups.

What is Form 8974 used for?

Form 8974 determines the qualified small business payroll tax credit for increasing research activities, which you elect on Form 6765. It does not calculate NMTC and it does not replace Form 8874.

Where can I read the law on NMTC rates and recapture?

See section 45D of the Internal Revenue Code and the NMTC regulations at 26 CFR 1.45D‑1, which also explain how to report recapture tax on your return.