The Tax Cuts and Jobs Act (TCJA) offers a new tax incentive to those who invest in certain low-income communities designated as qualified opportunity zones (QOZ). Thousands of communities selected by each state’s governors have been qualified for participation in the program, ranging from inner-city neighborhoods to rural farmlands. Tax deferrals and exclusions are available to taxpayers to the extent that they invest capital gains in qualified funds in accordance with the program requirements.
Tax deferrals and exclusions are available to taxpayers to the extent that they invest capital gains in qualified funds in accordance with the program requirements.
The first round of guidance was released in October 2018, and program stakeholders have been busy providing feedback to the Treasury Department and IRS to help shape the final regulations. Over 170 comment letters were submitted from a broad range of interested parties. We submitted a comment letter focusing on areas where more clarity might help expedite participation by both funds and investors. In our comment letter, we made the following recommendations:
- Ensure that qualified opportunity funds have time to raise, deploy, and redeploy capital.
- Clarify that qualified opportunity zone business property (QOZBP) can include improvements to property that is not QOZBP.
- Clarify how vacant land should be treated in applying the qualified opportunity fund and qualified opportunity zone business (QOZB) tangible property tests.
- Clarify the calculation of outside basis for investors in a qualified opportunity fund.
- Clarify that qualified opportunity fund investors can exclude gain from a sale of assets by the qualified opportunity fund or QOZB by making an election under 1400Z-2(c) when the qualified opportunity fund investors exchange their interests in a related transaction.
In addition to the public comments, in January 2019, United States Senator Tim Scott (R-SC), along with a bipartisan group of 16 senators and representatives, delivered a letter to the Treasury Secretary regarding the opportunity zone incentive. The letter acknowledges aspects of the guidance that the co-sponsors of the Investing in Opportunities Act felt reflected the intention of the program, expressed concerns about limitations that the proposed regulations added, as well as areas yet addressed, and urged Treasury to make the program workable for operating businesses.
Additionally, the IRS held a public hearing in February 2019 where more than 20 speakers expressed their opinions to a panel of Treasury and IRS officials, as well as a capacity audience. Common themes from both the comment letters and the public hearing include those addressed in our comment letter, as well as the following:
- Commending Treasury for components of the proposed regulations, including the 70 percent “substantially all” test for QOZBs and the safe harbor at the QOZB level
- Concerns that requiring 50 percent of a QOZB’s gross income to be sourced to opportunity zones will limit the type of eligible businesses
- Flexibility requested for the tax-free reinvestment of interim gains
- Granting of additional safe harbors for startup businesses
- Recommendation that unadjusted cost basis be a permitted valuation method for measuring tangible property
- Reporting requirements requested to assist in tracking the program’s impact and prevent program abuse
- Clarity sought on the interaction of QOZ investments with other tax incentive programs
We’re optimistic that we’ll see the second tranche of proposed regulations in the first quarter of 2019, and we’re committed to analyzing and commenting on this second round of guidance upon its release.
To learn more about how your business or portfolio can receive tax benefits by investing in opportunity zones or how to start a qualified opportunity fund, please contact us today.