IRS Releases Further Clarification on Opportunity Zones
The 2017 Tax Cuts and Jobs Act included a variety of tax code updates and additional provisions. Among these was the creation of a new type of community development program, dubbed “Opportunity Zones.” The IRS defines these areas as “economically-distressed [communities] where new investments, under certain conditions, may be eligible for preferential tax treatments.”
IRS Releases Additional Guidance on Opportunity Zones
On April 17, 2019, the IRS released a second round of guidance on Opportunity Zones. This was a welcome occurrence, since the original Opportunity Zone legislation was quite vague, and the first round of IRS additional guidance resulted in more questions than answers. Here’s a quick look at some of the bigger items included in the recent IRS release:
1. Clear Qualifications for the 50% Test
The first round of IRS guidance established a “50% test” requiring that businesses seeking to qualify for the Opportunity Zones program must derive at least half of their total gross income from business activities within the qualified Opportunity Zone. Many businesses were quite disconcerted by this ambiguous rule. The new IRS guidance offers four distinct qualification tests based on (1) total hours worked, (2) total hours paid, (3) source of gross income, and (4) “facts and circumstances.” A business need only pass one of the tests to qualify.
2. Attempts to Ease Compliance
Opportunity Zone compliance regulations require that a fund maintain 90% of its assets invested in the Opportunity Zone. The new guidance attempts to make ensuring compliance easier. It also clarifies that an Opportunity Zone fund has 12 months to reinvest the proceeds from the sale of assets owned by the fund, an area of previous contention.
3. Clarification Regarding Leased Property
The language of the legislation established Opportunity Zones required that the property must be purchased. The new IRS regulations clarify that leased property (acquired after December 31, 2017) can qualify if substantially all of the use of the leased tangible property is in a qualified Opportunity Zone during substantially all of the period for which the business leases the property.
4. Greater Flexibility for Investment and Reinvestment
Under original regulations, Opportunity Funds had a 31-month safe harbor for real property only. Under the new guidance, the allowance period is available not just for cash for real estate, but for business development, as well. Additionally, the IRS took steps to reduce the risk to investors in Opportunity Funds by creating a six-month grace period before counting contributed cash assets and granting a one-year reinvestment period for reinvesting funds, if an investor feels the need to pull out.
The new IRS release is quite complicated, containing 169 pages of further guidance pertaining to opportunity zones. The above offers a brief overview of some of the bigger items. If you’re interested in finding out more about Opportunity Zones, consider visiting the IRS website and consulting your tax advisor.