Opportunity Zones Program Update

Chris Schmenk.
Bricker & Eckler.

Opportunity Zones Program Update: The Opportunity Zone Program is a new federal economic development program approved in December’s tax reform law.  The program establishes “Opportunity Zones” in areas that meet certain census-tract criteria (low-income and high poverty).  Third parties will then establish “Opportunity Funds”, which will be investment vehicles organized with the specific purpose of investing in assets in the designated Opportunity Zones.  Rules are still being developed by the Department of Treasury, but it appears the funds must hold at least 90 percent of their assets in qualifying property.  Funds will be able to invest in operating businesses, equipment, and real property. Investors can then invest in these approved Operating Funds and will receive favorable benefits including: 1. A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026; 2. A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation, and 3. A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.

Proposed zones were submitted by states to the US Department of Treasury by March 21.  Ohio’s Development Services Agency recommended 320 zones.  Final recommendations were apparently based on local/regional cooperation and prioritization, multiple submissions of a single tract, planned job creation and possible capital investment in the census tract.   On April 9, the Department of the Treasury and the Internal Revenue Service (IRS) announced designated Opportunity Zones in 18 states and territories. The 18 states and territories receiving designations are only a part of the first group, and additional state designations (including Ohio’s) will be named in the coming weeks.  More information on the program can be found at: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

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