February 13, 2019
By: Ian S. Ludd
The 2017 Federal legislation “Tax Credit and Jobs Act” created a new opportunity for both businesses and residents of economically distressed communities.
The benefits offered by the new Opportunity Zone Program created by the Tax Credit and Jobs Act has the potential to attract significant investment to qualified Opportunity Zone businesses across the country and here in Central New York. A map of tracts available for this Program in Central New York can be found at the following link: https://esd.ny.gov/sites/default/files/CNY-Region-OZ.pdf A list of the tracts here: https://esd.ny.gov/sites/default/files/FINAL-Recommendations-OZ-42618.pdf.
The Opportunity Zones program (codified in new Internal Revenue Code sections §1400Z-1 and §1400Z-2) and subsequent regulations proposed by the Treasury Department in October of 2018 encourages investment in these Opportunity Zones (“OZs”) by offering three major federal income tax incentives to investors:
(1) a temporary deferral of capital gain until 2026,
(2) a step-up in basis of up to 15% of the original gain, and
(3) a permanent exclusion from taxable income of capital gains made from the investment in an OZ (if held for 10 years).
Investors invest in OZs by investing capital gains into the new investment vehicle of a Qualified Opportunity Fund within 180 days of the sale or distribution of the gain. The magnitude of these tax benefits depends on how long an investor holds their investment in the Opportunity Fund (5, 7, and 10-year periods). Keeping the earned gain in a qualified Opportunity Fund for ten years will result in a reduction of the gain through an allowed step up in basis of 15%.
This new tax break designed to encourage economic growth in certain census tracts could be beneficial for both business owners and communities. There are numerous rules regarding the program and some regulations that still need to be finalized. The Internal Revenue Service has scheduled a public hearing on Qualified Opportunity Zone Funds for February 14, 2019 and the IRS has created a FAQ page which provides a good overview for initial analysis (see https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions).