Qualifying QOZs

May 30, 2019

By Roger Russell at Accounting Today on May 28, 2019

The Internal Revenue Service has issued its second round of proposed regulations on the Qualified Opportunity Zone provisions included in the Tax Cuts and Jobs Act. While the first set of regs, issued Oct. 19, 2018, answered many questions regarding the opportunity zone provisions, the new set further clarifies a number of areas.

QOZs were added to the Tax Code in Section 1400Z late in the legislative process leading up to the TCJA, and attracted little attention at first. Once investors understood the potential for deferring or abating capital gains offered by the provision, interest mushroomed. However, investors, for the most part, stayed on the sidelines until the provision was “fleshed out” by the regs. (For more, see Tax Strategy, opposite page.)

QOZs are an attempt to attract investment to designated low-income communities, as the term is defined by Code Section 45D. The zones were designated by the Treasury based on recommendations by state governors using census tract data. There are nearly 9,000 such zones, comprising both rural and urban areas. The goal is that private investments in these zones will spur economic growth and job creation.

The new regs are extensive, and are generally taxpayer-friendly, according to Marla Miller, tax managing director at Top 10 Firm BDO USA.

“The regs clarified matters for businesses waiting on the sidelines because of uncertainty over the 50 percent rule [to qualify as an OZ business, the business must receive at least 50 percent of its gross income from the active conduct of a business in the QOZ]. This was important to get venture capital involved. And for real estate investors, they made it clear that leasing property — other than a triple net lease — or rentals would be considered a trade or business,” Miller explained.

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