Opportunity Zones were created to help stimulate the economy in low-income and distressed communities. In April 2015, a white paper was issued by the Economic Innovation Group (EIG) titled, “Unlocking Private Capital to Facilitate Economic Growth in Distressed Areas.” Written by Jared Bernstein of the Center on Budget and Policy Priorities and Kevin. A. Bassett of EIG, this research provided the groundwork to pave the way for both the House of Representatives and Senate to introduce legislation to their respective counterparts.
In the House, it was first introduced by Rep. Patrick Tiberi (R) as the “Investing in Opportunity Act,” and later introduced in the Senate in February 2017 as the “Tax Cuts and Jobs Act of 2017” (TCJA). Senator Tim Scott (R) of South Carolina and Senator Cory Booker (D) of New Jersey supported the Senate version of the bill, along with many other legislators, business leaders and government officials. House Representatives and Senators from both sides of the aisle supported this legislation in a bipartisan effort.
The idea behind this piece of legislation was to incentivize investors so they would realize capital gains in exchange for both near-term and long-term tax benefits. The investors could then reinvest their gains with both real estate and business opportunities in low-income communities.
When creating the Opportunity Zone program, several factors were considered, including:
- The geographic scope of where opportunities would exist;
- The fact no limitations were placed on the dollar amount a business was required to invest;
- The flexibility of the program making it easy to implement and understand; and
- The ability for a large percentage of investors in the United States to take part in this incentive program.
When TCJA was first enacted, 8,761 census tracts were nominated as “opportunity zones” by Governors in all 50 states, the District of Columbia and all five US territories, found in Sec. 1400-Z1 of US Tax Code. These 8,761 tracts represented 25% of the country’s low income census tracts, later confirmed by the US Treasury.
Prior programs, such as the New Market Tax Credit and Enterprise Zones Tax Credit were more restrictive, requiring investors to understand how to use tax credits to offset their current year income. The Opportunity Zone legislation was more easy to understand and use, with no annual dollar amount limitations.
Immediate tax incentives could be realized through capital gains deferral while long-term benefits could be obtained through tax-free appreciation. Sec. 1400-Z2 of the US Tax Code provides detail on the rules on how capital gains can be invested in opportunity zones.
With over 90% of the American Economy comprised of small businesses, there are many opportunities to pour capital into these opportunity zones. The amount of capital gains incurred from these businesses is significant, creating a win-win for both the investor and these disadvantaged communities.
Many communities and investors have benefitted from the legislation set forth by the 2017 Tax Cuts and Jobs Act. We strive to make both companies and investors informed of tax relief benefits, while helping communities realize their best economic potential. The OZ program is one where everyone benefits when the program is implemented successfully.
Contact us to learn more about the benefits of QOZBs.