The Tax Cuts and Jobs Act created the Opportunity Zone program, which was designed to encourage investment in economically distressed communities by allowing taxpayers to defer and potentially exclude certain portions of their gains if the proceeds are timely reinvested in qualifying businesses or property located in qualifying census tracts that have been designated as an Opportunity Zone (OZ).
Last Friday, the Treasury Department and the IRS proposed the first round of OZ regulations, a related revenue ruling clarifying the treatment of land for purposes of qualifying for the OZ benefits, and a draft Form 8996 to elect and report status as a Qualified Opportunity Fund (QOF). Notably, the proposed OZ regulations clarify the following:
- Only “capital” gains for federal income tax purposes are eligible for the OZ benefits.
- Provides a 31-month “working capital” safe harbor for qualifying businesses that acquire, construct or rehabilitate real and tangible business property in an OZ, which will allow qualified opportunity zone businesses to hold cash or other liquid assets as long as there is a written schedule consistent with the ordinary business operations that such working capital will be used within the 31-month period to acquire, construct or substantially improve the OZ property (and such working capital is so expended).
- For purposes of meeting the “qualified opportunity zone business” test, the “substantially all” threshold is satisfied if at least 70 percent of the tangible property owned or leased by the business is qualified as opportunity zone business property. The IRS and Treasury Department are continuing to study the other instances in the OZ program where the “substantially all” threshold is used and specifically requested additional comments on the different uses of this threshold.
- OQF includes any entity that is treated as a corporation or partnership for federal income tax purposes, and thus limited liability companies can qualify as a QOF.
The Treasury Department and IRS are continuing to work on additional regulations, and it is possible that a second round will be released before the end of the year.