How to Set Up a Qualified Opportunity Zone Business - Before Year End! And Certain Other Snazzy Year-End Tax Planning Strategies

05.12.2018 | S&W Tax Briefing

The new tax incentives under the Opportunity Zone Act (OZ Act), introduced this year and contained in Code Section 1400Z-2, have grabbed the attention of those American taxpayers who want to defer their capital gains recognized in 2018 – which is to say, almost everyone, including you!

The single biggest gatekeeping issue is how and whether investors who are ready to invest 2018 gain – or in some cases have already invested gain proceeds – into a Qualified Opportunity Fund (QOF) can find a financially prudent qualified investment for those funds before year end 2018, when the first penalty deadline under the OZ Act takes effect.

Although the initial focus of most investors has been to search for real estate development projects located in opportunity zones, the real “opportunity” is much broader than that. In fact, a persuasive argument can be made that the foremost purpose of the OZ Act is to promote creation of new businesses – including high-tech start-up businesses – in specified OZ locations. In short, the OZ Act is being cast as a real estate incentive when it is actually the biggest venture capital tax incentive to come down the pike in years.

This seminar addressed the huge pent-up demand of capital gains recognized in 2018 that is looking for a place to land – and land, if possible, before we pop the champagne corks on 2018. Any fledgling business that can accept funds in 2018 with a credible investment and business plan will not lack for potential investors or investment interest. This seminar addressed the technical challenges and practical strategies for setting up a Qualified Opportunity Zone Business (QOZ Business) before the end of 2018.

Topics addressed included:

  • The technical requirements, including investment deadlines, to set up a QOF and then invest timely into a QOZ Business
  • The key differences between operating a business through QOZ Business, rather than through a QOF
  • Interpreting and applying the requirement that “substantially all” of the tangible property owned or leased must be QOZ Business Property, in light of ongoing uncertainty about how leased property will be treated
  • How to set up a “written plan” for working capital and enjoy up to 31 additional months to deploy funds in the investment project
  • Insights on whether a QOZ Business can lease real property as its business “home” in the OZ rather than purchase the property outright
  • How to meet the “substantially all” requirements with respect to tangible property, and also the “substantial use” requirement with respect to intangible property
  • How to interpret the “active” business requirement, including whether triple-net leasing of real property will constitute a qualifying business, and also how to “source” active business income to the OZ as required by the OZ Act

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