Every so often, there are new economic incentives provided to businesses by the federal government. One such new opportunity came in the form of Qualified Opportunity Zones. Having been around only since 2017 with the passing of the Tax Cuts and Jobs Act (the “Act”), this is a new incentive to investment in designated areas to promote economic development and improvement..

After the Act took effect on January 1, 2018, the Department of Treasury’s IRS moved quickly to designate nearly 9,000 zones within all 50 states, including the District of Columbia, as well as five US territories. The zones had been designated from list submitted for consideration by each state’s Governor, and are scattered in practically every corner of the country. Given the wide dispersal of Opportunity Zones, there are many opportunities to conduct business and invest in these zones where there are the unique tax benefits.

There are lots of areas within the United States that have been suffering from a lack of economic development. These areas in particular were identified by the government as potential Opportunity Zones  to help spur job creation and business development.

One of the most enticing incentives for investors are tax-related benefits. When an investor invests capital gains into one of these areas, they will be able to defer tax on eligible capital gains and eliminate entirely capital gains tax on the property or business in which they invested if they meet the criteria under the Act..

How Opportunity Zones Spur Economic Development

Opportunity Zones are specifically designed to increase economic development by using tax benefits as a way to entice investors to invest in property or businesses in them. There are a few ways this is possible.

First, when an investor invests capital gains into a Qualified Opportunity Fund (QoF), which in turn invests in Opportunity Zone Property (OZP) of Businesses (OZB), the tax on these gains is deferred.  Second, if the funds are held for the minimum period, then the tax on these realized gains are reduced by as much as 15%.  If the investment in the Qualified Opportunity Fund is held by the investor for over five years, there will be a 10% exclusion of the deferred gain. When a QOF is held for over seven years, the exclusion will increase to 15%.  Finally, the gains on the investments in QoFs are themselves free from capital gains tax if held for the minimum holding period.

You should understand that these tax benefits will only be provided for investments of capital gains in the Qualified Fund. You will be unable to receive the tax benefits from this program if you purchase an interest in a Qualified Fund with cash or cash equivalents not stemming from capital gains. Also, if you receive an interest in a Qualified Fund by performing services for that fund, you will be unable to reap tax benefits.

Taking the Opportunity of an Opportunity Zone

Qualified Opportunity Zones are not just geared towards giving tax breaks to investors, but businesses are also able to take advantage of this new program as well. By meeting the standards for being an Opportunity Zone Business (OZB), owners can greatly increase the potential capital they can attract from investors.  The three pillars of a successful company are: idea, execution and capital.  Opportunity zones give business owners a new avenue for attracting capital, perhaps making the difference between success and failure for some.  If you are an investor or have a business that is looking to benefit from tax incentives for investing all around the United States, the Qualified Opportunity Zones are advantageous places to explore.