Latest IRS Updates for Opportunity Zone Program - Invest in Opportunity Zones

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Taxpayers waiting for further clarification about Opportunity Zones will be pleased to see the latest guidance on the program released from the U.S. Department of Treasury. While further guidance is still expected, this latest release is a significant first step toward unlocking the program’s economic potential.

Key Updates for Taxpayers

  • The tax benefit applies to all types of capital gains; ordinary gains are excluded from the program. There is no dollar limit.
  • Taxpayers do not have to commit all of their capital gains from the sale or exchange of an investment to an Opportunity Fund; they can elect to invest as much or as little as they like.
  • Only deferred gains will be excluded from distributions for taxpayers in partnerships.

Key Updates for Opportunity Funds

  • Opportunity Funds must be organized as partnerships or corporations (which includes limited liability companies) to qualify.
  • Opportunity Funds do not need to be newly formed entities. Existing entities may qualify as long as they meet all the other requirements.
  • Qualifying entities can select the month in which they commence operation as an Opportunity Fund, which then determines the end of the taxable year. This flexibility allows the entities to time the biannual 90% asset test necessary for compliance.
  • An Opportunity Fund’s audited or filed financial statements will be used to satisfy the 90% asset test.
  • Opportunity Zone designations are currently scheduled to expire in 2028, but taxpayers may hold Opportunity Fund investments beyond that date to meet the 10-year requirement for maximum tax benefits.

Key Updates for Opportunity Zone Businesses

  • An Opportunity Zone business must derive at least 50% of its gross income from activities within a designated Opportunity Zone to qualify.
  • To satisfy the “substantially all” requirement, 70% or more of the business’s tangible and intangible property must be used within an Opportunity Zone.
  • Businesses have up to 31 months to exclude working capital as a non-qualified financial asset, provided there is a written business plan and timeline documenting when the funds will be put to use. This gives businesses, especially those with heavy construction and working capital needs, more flexibility to complete larger projects.
  • For existing structures on land within an Opportunity Zone, the definition of “substantially improved” will apply to the building only. The cost of improvements must be double the owner’s basis. This requirement incentivizes the revitalization of vacant buildings.

Expected Guidance in 2019

The U.S. Department of Treasury is seeking feedback and input on several issues going forward, including

  • Clarification on the definition of the “original use” designation as it applies to Opportunity Zone properties.
  • A regulatory framework for invested capital thresholds at different points on the Opportunity Fund’s investment timeline.
  • Clarification of the treatment of reinvested capital gains during the investment period.
  • Establishing conditions for deadline flexibility for taxpayers to roll over gains and meet the first 90% asset test milestone.

Stakeholders are encouraged to submit feedback on the guidance by December 28, 2018. The U.S. Department of Treasury and the IRS will hold a public hearing in January 2019 about the proposed regulations.

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