New Federal OZ Regulations to OMB; DOE Prioritizes OZs; Proposed Federal OZ Reporting Bill; and SC adds state incentives to OZ program

On Friday, December 6th, the IRS/Treasury delivered to the White House’s Office of Management and Budget (OMB) , approximately 500+ pages of final regulations for Opportunity Zones. Hey now!

OMB has up to 30 days to review these regulations and then issue them as final regulations in the Federal Register. They will likely try to do this before year’s end but it may slip into January, we shall see. As soon as these regulations are made public we will be happy to share them, but be aware this is going on now.

Also, remember that if you have 2019 capital gains that are still within 180 days of the gain triggering event, you have until 12-31-2019 to take advantage of the 15% reduction in the amount that will be subject to capital gains tax if the capital gains are placed into a qualified Opportunity Fund (QOF) by this date. If you MISS this date, the sky does NOT fall, the program does NOT end, Armageddon does not happen, you are merely only entitled to a 10% reduction in 2020 and 2021 if you follow the rules and invest capital gains in these two years. The rough math on this works out to be $12,000.00 of savings per $1 Million of gain one puts into a QOF in 2019 vs. 2020. Thus, if you have the time and a good deal to invest in, sure, save the $12,000 per million of investment in a QOF; but this 15% should not be the ONLY reason you are doing a deal.

As this continues to be the focus of many a call and conversation – please remember that Non-Capital gains CAN be used in OZ transactions. Yes, non-capital gains CAN be used. They just get NONE of the benefits of deferral, reduction or capital gains elimination on a sale after 10 years. The investor with NON capital gains can still get typical fees that are usually ordinary income on annual revenue returns and ordinary capital gains tax treatment for sales after 10 years that are not eliminated (I.E., IF YOU START WITH NON CAPITAL GAINS YOU DO NOT GET FREE SALES TREATMENT), rather, like any other deal, non-capital gains investments are subject to normal capital gains payments on a sale.

More from the Federal Government – Department of Education Priorities – per Novogradac, the U.S. Department of Education published a rule in the Federal Register announcing that it will prioritize funding for grant applications that support students, teachers and parents in opportunity zones (OZs). The Department of Education last year encouraged projects in nine grant competitions to support students in OZs and more than half of the 238 grants awarded went to applicants proposing to serve OZs. The new priority is effective Dec. 27, 2019.

Notification and Reporting – Sen. Tim Scott, R-S.C., and seven co-sponsors–including Senate Finance Committee Chairman Chuck Grassley, R-Iowa– submitted a bill to establish reporting requirements for the opportunity zones (OZ) incentive. The Improving and Reinstating the Monitoring, Prevention, Accountability, Certification and Transparency of Opportunity Zones (IMPACT) Act would require qualified opportunity funds to report myriad information on assets and property owned and investors to report specific information on OZ investments. The legislation proposes penalties for individuals and funds that don’t accurately make timely reports; requires the Treasury Department release timely information tracking QOFs and their investments; and requires Treasury to issue a comprehensive report on economic and demographic information concerning OZs every five years. While there seems to be bi partisan support for some level of reporting requirement, there is not yet agreement on the form this report will take.

States Continuing to Incent OZ Investment Behavior – Legislation was introduced in the South Carolina which would create a state low-income housing tax credit (LIHTC) for properties in opportunity zones (OZs), create a 25% tax credit for investment in the state’s OZs and add OZs to other state incentive programs. H. 4657 in SC would automatically qualify LIHTC developments in OZs for a new state LIHTC equal to the federal credit and would also create a 25% state credit for investments in OZs, with an annual cap at $50,000 per taxpayer. The bill would also create additional value for the state jobs tax credit for jobs in OZs in lower-income Tier III or Tier IV counties, create a sales tax rebate or credit for grocery stores located in OZ food deserts, add a grant program for OZ investments in Tier III and Tier IV counties and create an OZ leadership task force. Way to go SC – good stuff.

My team and I are around for the rest of the year if you have questions or are looking to get funds invested, funds created or deals done. WE have closed 29 OZ transactions to date and are working on 37 more under signed letters of engagement. We look forward to working with you. bamolotsky@duanemorris.com