Opportunity Zones - 2018 Tax Cuts & Jobs Act OverviewOpportunity Zones

One of the little-known features of the Tax Cuts and Jobs Act (TCJA) is the incentive for so-called “opportunity zones.”

Designed to encourage investment in depressed communities around the country, this tax break was supported by an unlikely coalition of billionaires and politicians—see this fascinating Forbes article for more about the back story.

So, how does it work?

The opportunity zone tax break has three key features:

  1. It allows an investor to defer tax on existing capital gains by investing in a “qualified opportunity fund.” The gain is deferred until the investment is sold or 2026, whichever occurs first.
  2. It reduces the existing gain. If the investment is held for a minimum of 5 years, the existing gain is reduced by 10%. If the investment is held for a minimum of 7 years, the existing gain is reduced by an additional 5%. However, the reduced tax bill on the existing gain will be payable no later than 2026.
  3. If the investment is held for at least 10 years, any new gain—i.e., gain on the investment itself—will be tax-free. Period.

Who can take advantage of this?

The short answer is, practically anyone. A “qualified opportunity fund” is merely a partnership or corporation which invests in a designated “qualified opportunity zone.” While the rules are somewhat technical—for example, the fund must purchase tangible property and use it within the designated “qualified opportunity zone” —this tax break is not limited to large financial institutions. As pointed out in the Forbes article, venture capital firms may begin directing startups to set up shop in the closest qualified opportunity zones.

This tax break can also be useful to a small business owner who has capital gain to defer and is able to either identify or create a business opportunity in a qualified opportunity zone. For example, a manufacturer that needs to expand in the region anyway may decide to locate its new factory in a qualified opportunity zone. But do not let the tail wag the dog—after all, a tax-favored bad investment is still a bad investment.

Opportunity Zones are a little-known feature of the Tax Cuts and Jobs Act (TCJA) and can be leveraged by small businesses to defer and reduce the tax bite of existing capital gains.
Call East Bay Business & Tax Lawyer Jonathan C. Watts to explore how you might take advantage.

To find out if this makes sense for your business, reach out to Jonathan Watts by calling the office at (925) 217-3255 or . He will get back to you at his earliest convenience.

If this is of interest to you, please read our July 2018 post: “After the Tax Cuts and Jobs Act of 2017