Paul L. Caron

Saturday, August 20, 2022

COVID-19 Relief For Opportunity Zone Funds And Investors

Adam Wallwork (Deloitte; Google Scholar) & Gary Hecimovich (Deloitte), COVID-19 Relief for Opportunity Zone Funds and Investors, 71 Clev. St. L. Rev. __ (2022):

This article describes how temporary changes to the qualified opportunity zone (QOZ) tax incentive, combined with new reliance regulations that clarify the requirements for qualified opportunity zone businesses (QOZBs) to modify their written plans to expend working capital in response to the ongoing coronavirus emergency, will make more individuals and entities eligible for federal tax stimulus by increasing flexibility for the qualified opportunity funds (QOFs) and QOZBs in which they invest to redeploy their capital into qualifying business development projects in a QOZ.

Federal tax incentives for qualified opportunity zones (“QOZs”) under sections 1400Z-1 and 1400Z-2 of the Internal Revenue Code of 1986, as amended (the “Code”) aim to encourage economic growth and investment in distressed areas by providing economic stimulus to businesses operating within designated boundaries. The targeted areas are those that satisfied certain eligibility criteria (generally communities with 20 percent or greater poverty rates or median family income less than 80 percent of the statewide median) and were selected by governors of states and territories and the mayor of D.C. in 2018 to receive the federal tax benefits of the economic development program for QOZs. 

The federal tax benefit under the QOZ program flow to investors who timely roll over certain capital gains and section 1231 gains from prior investments (“eligible gain”) into specialized investment vehicles called qualified opportunity funds (“QOFs”) which invest in qualified opportunity zone businesses (“QOZBs”) and business property (“QOZ Business Property”) located in a QOZ. Taxpayers that invested in a QOF during 2021 can defer a corresponding amount of eligible gain realized until 2026, unless the QOF investment is sold earlier, and reduce by 10% the amount of deferred gain recognized in 2026 by holding the investment for at least five years. The benefit available to taxpayers who make a qualifying investment of deferred gain in a QOF and hold the investment for 10 years is the ability to exclude post-acquisition appreciation from income upon a sale or exchange of an interest in the QOF through December 31, 2047. This step-up in the basis of the QOF investment to fair market value after a 10-year holding period is valuable even if the QOF interest does not appreciate, since a step-up to fair market value covers both economic appreciation and reversal of tax depreciation, eliminating recognition of taxable gain at the time of a later sale or exchange.

Scholarship, Tax, Tax Scholarship | Permalink