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The Internal Revenue Service (IRS) finally issued much needed guidance, in the form of proposed regulations, on Qualified Opportunity Zones (QOZs). The guidance provides investors/taxpayers with an initial set of rules on how to qualify for the special tax break for investments made into Qualified Opportunity Funds (QOFs). As noted in our article of July 11, 2018, investment in QOZs can provide three substantial federal taxpayer benefits to electing taxpayers:
Utilization of the above provisions can substantially, and permanently, reduce the amount of overall federal taxes paid. For example, the effective individual capital gains rate on the sale of capital gains assets be reduced from 20% to as low as 8.5%. On total appreciation of $10,000,000 ($5m deferred gain and $5 additional appreciation), the cash tax savings could be $1,150,000.
The Tax Cuts and Jobs Act created QOZs effective as of January 1, 2018. Members of Congress believe that the use of these zones will spur business investment, economic development, and job growth in economically disadvantaged areas throughout the United States (there are over 8,700 approved zones). However, many taxpayers have been hesitant to begin taking advantage of the tax savings “opportunity” until the IRS provided additional operating rules. As of Friday, October 19, the IRS provided the initial set of generally taxpayer-favorable rules.
Key provisions in the proposed regulations include:
Taxpayers who want to take advantage of the tax benefits derived through investment in QOZs have a couple of options they can pursue. They can choose to reinvest realized gains in QOFs established by third-party developers and investment advisors or they can choose to form and operate their own QOF. QOFs need to be identified or formed well in advance of the expiration of the 180-day period to allow sufficient time to meet the gain reinvestment requirements.
Further, the QOF also has its own requirements to invest the funds it receives into qualified opportunity zone businesses and properties in a timely manner. Generally, the fund must invest at least 90% of its assets in qualified opportunity zone property.
The rules are new and are being analyzed in more detail. However, this congressionally permitted form of tax-saving strategy is worthy of consideration. Please contact Schneider Downs & Co., Inc. as soon as possible for assistance with the QOZ planning and compliance process.
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