IRS Announces Public Hearing on Proposed Regulations for Opportunity Zones
A message from the Land of O.Z.
The Tax Cuts and Jobs Act created a section of the tax code that allows taxpayers that have qualified capital gains (long-term or short-term) to received tax benefits through a new investment vehicle called Opportunity Funds. The purpose of the new investment vehicle is to help direct resources to low-income communities, known as Qualified Opportunity Zones, through a market-driven approach. The IRS has announced a public hearing scheduled for February 14, 2019, on proposed regulations released in October for Opportunity Zones. This hearing was originally scheduled for January 10, 2019, but was postponed due to the partial government shutdown.
The investment in Opportunity Funds is time sensitive (within 180 days of realizing the qualified capital gain) and can provide the following three tax incentives to investors:
- Deferral of payment of tax on capital gains
- Reduction of the amount of gain realized if held in an Opportunity Fund for 5 and 7 years
- Permanent exclusion of gain on the appreciation of an investment in the Opportunity Fund if held for 10 years or more
Kansas has 74 Census tracts designated as Qualified Opportunity Zones. The Kansas Department of Commerce has created an interactive map that allows for identification of these specific areas of interest.
The IRS has released final Qualified Opportunity Funds IRS Form 8996 to file if you have formed an Opportunity Zone fund. Investors IRS Form 8949 has been finalized by the IRS to report reinvested gains in an Opportunity Fund.
The Opportunity Zone program is very scalable to about any size of an investor. From a taxpayer selling a family business to a high net worth individual realizing gains from investment holdings, the benefits are attractive. The program is very much project-driven so as more projects are developed, more opportunity will be available for investors.
Many Kansas projects are in the works as a result of the new law. It is not clear how capital will find its way to Opportunity Zone projects. The capital available to fund projects appears to be isolated to communities with projects. To date, we are unaware of Kansas or regional Opportunity Funds that have been created for the investment of qualified gains. We have made an inquiry with the Kansas Department of Commerce and have not received a response on information regarding the development of a Kansas Opportunity Fund. The National Council of State Housing Agencies published a list of funds available HERE that is still growing. Another list is available HERE. However, there’s no way of knowing what percentage of the available funds these lists capture because participation is voluntary.
Opportunity Zone law still has remaining questions and issues. Additional proposed regulations are expected to be issued this spring by the IRS that could clarify. Some issues that remain include requirements on Opportunity Zone businesses to have at least 50% of gross income from the active conduct of business in the Opportunity Zone; treatment of capital gains for the Opportunity Fund to allow the permanent exclusion of gain after 10 years; and treatment of single-member LLC’s as Opportunity Funds.
Galen Pfeifer, CPA, Partner, specializes in working with clients investing in Opportunity Zones. With over three decades of experience, he also leads Adams, Brown, Beran & Ball, Chtd.’s Mergers, Acquisitions & Valuations (MAV) Service Line. In addition to being a CPA and holding the Accredited in Business Valuation (ABV) credential, Galen is also a Personal Financial Specialist (PFS) and Certified in Financial Forensics (CFF). For more information, he is available by email.