The U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued a second set of proposed regulations pertaining to Opportunity Zone (OZ) implementation on April 17. The 169-page document contains technical tax provisions. IRS also released a Notice and Request for Information (RIF) seeking public input regarding the type of public information needed in order to track investments in qualified opportunity funds (QOFs).
An Opportunity Zone is composed of “low-income” census tracts that have a poverty rate of at least 20% and median family income no greater than 80% of the area median income. A census tract that is not “low-income” may be designated as part of an OZ if it is contiguous to low-income tracts that make up an OZ and it has a median household income that does not exceed 125% of the median income of the contiguous low-income census tracts that form an OZ. Up to 5% of the census tracts may qualify under this exemption. There are 8,761 Opportunity Zone.
The Request for Information (RIF) states the purpose of information collection and tracking is to measure the effectiveness of [OZ] policy in achieving its stated goals and to ensure that this investment opportunity remains an attractive option for investors to use. Using an existing QOF Form 8996, Treasury could determine and report publicly on the number of QOFs, the aggregate amount of investment in QOFs, and the portion of that investment reported as “qualified opportunity zone property.” However, the current Form 8996 lacks enough granularity for Treasury to determine the amount and type of investment flow into an individual qualified opportunity zone through a QOF.
Consequently, the RIF poses a set of seven questions to the public. For example:
- What data would be useful for tracking the effectiveness of providing tax incentives for investment in qualified opportunity zones to bring economic development and job creation to distressed communities? Treasury asks the public to suggest measures that would signal improved economic development in local target markets and neighboring areas, as well as measures of job creation specific to the distressed community.
- What data would be useful for measuring how much would have been invested in qualified opportunity zones in the absence of OZ incentives?
- What concerns exist regarding the ability of job creation to match local labor force skills, and OZ investment crowding out other private or public investment.
Regarding the technical tax provisions in the second set of proposed OZ regulations, an IRS news release (IR-2019-75) states that the proposed regulations allow the deferral of all or part of a gain that is invested into a Qualified Opportunity Fund (QOF) that would otherwise be includible in income. The gain is deferred until the investment is sold or exchanged or December 31, 2026, whichever is earlier. If the investment is held for at least 10 years, investors may be able to permanently exclude gain from the sale or exchange of an investment in a QOF.
The proposed rule would permit tangible property acquired after December 31, 2017, under a market rate lease to qualify as “qualified opportunity zone business property” if during substantially all of the holding period of the property, substantially all of the use of the property was in a qualified opportunity zone. A key part of the proposed rule clarifies the “substantially all” requirements for the holding period and use of the tangible business property.
To date, there are no regulatory provisions specifying that investments must benefit low-income people, build affordable housing, employ low-income residents, or protect and support existing local business. Nor are there protections to prevent displacement of low-income people as a result of the new investments in the distressed communities. “Unless the Treasury Department quickly establishes regulatory guardrails,” said NLIHC President and CEO Diane Yentel, “there is no guarantee that low-income people will benefit in any significant way — if at all — from Opportunity Zones."
The proposed rule is at: https://bit.ly/2Dj8Cwm
The Request for Information is at: https://bit.ly/2VaQIpA