By Kevin P. Martin, Jr., CPA, MST
The Opportunity Zone Program was established as part of the Tax Cuts and Jobs Act as a way to spur private sector investments in low-income urban and rural communities. The program will provide tax benefits on investments in Opportunity Funds, or “O Funds.”
There are a number of private investors who are sitting on the sidelines with significant, unrealized capital gains. The program provides an incentive to these investors to re-invest those gains into O Funds in exchange for a temporary tax deferral and a “modest reduction” in capital gains taxes.
The Opportunity Zone Program will put to work “passive holdings” and provide a unique opportunity to drive investment capital into distressed communities, or Qualified Opportunity Zones (QOZ), which will be designated by governors in every U.S. state and territory. Governors are currently waiting on guidance regarding the process for submitting recommended, designated areas. This guidance is expected in early February 2018.
The Tax Cuts and Jobs Act enables the Treasury “to certify O Funds which will be created to pool and deploy investment dollars into QOZ’s for eligible purposes (stock, partnership interest, and business property).” Realistically, the program still has to be finalized and the Treasury has to propose a structure for implementation.
What we do know is that QOZ census tracts will be the basis for determining eligibility and definitions will mostly follow the New Markets Tax Credit (NMTC) Program – a low-income community census tract has an individual poverty rate of at least 20% and median family income up to 80% percent of the area median. The QOZ may include, with limitations, areas adjacent to the QOZ up to 125% of the median income of the adjacent low income community.
Many potential, program participants are already wondering “how’s it really going to work?” What we do know is that the NMTC program has been very successful and this program rings of similar attributes. What we don’t “fully” understand yet is “who” are these likely investors? Is it some of these repatriated dollars coming back from overseas? Will financial institutions set up qualified opportunity funds to market to wealthy clients near retirement as a safe place to park tax-deferred dollars in a slow-growing market for 5 to 10 years? Slower growth…but tax-deferred…that could be a good option.
There is a tremendous opportunity being made available under the Opportunity Zone Program. Some parts of our country missed out in the last economic surge. This program encourages socially conscious investors to join forces with entrepreneurs in distressed areas across America to finance small businesses, develop blighted properties and to finance local infrastructure projects.
A special note to our governors: What a great way to recruit investment without hurting the tax base! It’s an opportunity to build at scale while mitigating the risk of any one investor. What we’ve got is a very nimble funding vehicle. Now, let’s make sure the dollars end up in the right communities.