As a contractor, you know there are plenty of business opportunities with the federal government. You also know that Uncle Sam has put in place many socio-economic initiatives. If you’re an 8(a) or HUBZone business, you know this all too well. Browsing the news, you may have seen that the government is setting up what’s called the “Opportunity Zone Program.”
So what is it?
The aim of the program is to boost the economies of America’s most distressed areas. These locations are known as “Opportunity Zones.” Those who invest their money into these zones in return will get tax cuts.
That’s just the basics of it, but we’ll get into the fine details. Here, you will find out:
- How did the Opportunity Zone Program get started?
- Where are Opportunity Zones located, and what’s a Qualified Opportunity Fund?
- What are the benefits of a Qualified Opportunity Fund?
- When will I be able to invest in Opportunity Zones?
How did the Opportunity Zone Program get started?
The concept for the Opportunity Zone Program has hatched about 3 years ago. The architect of the idea was Sean Parker who was the creator of Napster and the first president of Facebook, Inc. He introduced it in a whitepaper along with Jared Bernstein (Chief Economist and Economic Adviser to Joe Biden) and Kevin Hassett (the current Chair of the Council of Economic Advisors). The main idea behind it was to use private capital to uplift economically distressed areas.
In February 2017, there was a bipartisan effort to introduce the Investing in Opportunity Act. Although it was brought up to the Senate, the bill never really took off. Later that year, there was the major piece of legislation being introduced called the Tax Cuts and Jobs Act of 2017. The Opportunity Zone Program was then inserted into that bill. After that, it was signed into law by President Trump.
Since then, the Treasury Department and IRS have been putting together regulations on how this program will work. Not everything is out yet, there are still a lot of questions that investors have, but there are some things we do know.
Where are Opportunity Zones located, and what’s a Qualified Opportunity Fund?
Opportunity Zones are located in every state and territory. That means from New York to Hawaii and from Puerto Rico to Guam. All of these areas are cut up into census tracts. The governors of these states and territories nominated up to 25 percent of eligible-low income census tracks to become Opportunity Zones.
You can find a map of your nearest opportunity zones here.
In order to invest in an Opportunity Zone, you need to create a Qualified Opportunity Fund (QOF). A QOF is pretty much the vehicle for investment in the designated areas. You can either set them up as a partnership or as a corporation. To get the tax benefits, at least 90% of the funds of the QOF need to be invested in property located in the Opportunity Zone. You do not have to live, work, or have a business in the Opportunity Zone either. Although self-certification forms were expected to be released by the IRS the summer of 2018, they are still yet to be available.
What are the benefits of a Qualified Opportunity Fund?
To make it easy, we’ll just break it down in a hypothetical scenario:
Let’s say that 10 years ago, you made a $200,000 investment. It could be in real estate, stocks, or even starting a business.
You sold your investment in 2018 and made $300,000.
This leaves you with a capital gain of $100,000.
Within 180 days of cashing out on your investment, you put the $100,000 in your Qualified Opportunity Fund.
Because it’s in the fund, you do not have to pay the taxes on your gain when you file your 2018 tax refund.
If the investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. $90,000 of the gain would be taxed instead.
If the investment lasts longer than 7 years, that exclusion jumps up to 15%, leaving only $85,000 of the gain to be taxed instead.
By 2026, if you’re still holding the investment in the Qualified Opportunity Fund, you will have to pay the taxes on the gain.
Then, if the property is held for a minimum of 10 years, you will not pay any taxes on the appreciation from when you bought it to when you sell it.
When will I be able to invest in Opportunity Zones?
The benefits for investing in Opportunity Zones speak for themselves. It’s not just a win for you, but it’s also a win for many of this country’s struggling communities.
“We anticipate that $100 billion in private capital will be dedicated toward creating jobs and economic development in Opportunity Zones,” said Secretary of the Treasury Steven Mnuchin.
Again though, the forms to self-certify an entity as a Qualified Opportunity Fund have yet to be released. Although a lot of the details about the tax breaks for investors are already out, the Treasury and IRS still have some work to do. Announcements were made around the middle of October, but everything is expected to be settled and established by the end of this year.