Q&A WITH CHERYL VINALL DENNEY
Tax reform act is creating incentives in low-income ‘Opportunity Zones’
Q: Included in the Tax Reform Act is a new economic development tool for investments in “Opportunity Zones.” What does this mean?
A: The Tax Cuts and Jobs Act created a new tool for economic development that is intended to incentivize investments in certain low-income census tracts to be designated as Opportunity Zones. Taxpayers will be able to reinvest gains from other investments into businesses or real estate developments located within these Opportunity Zones and defer federal tax on such gains for a period of up to nine years. In addition to the deferral of tax, the tax ultimately paid will be reduced if the taxpayer holds the investment for five or more years, and any gain on the investment in the low-income census tract will be exempt from tax if the investment is held at least 10 years.
Q: How will the new incentive work?
A: Many details of the new program will be detailed in regulations to be issued by the federal government. Generally, taxpayers will be required to make the investment in the Opportunity Zone through an Opportunity Zone Fund. We expect that many existing community development entities that participate in the federal New Markets Tax Credit program will also apply to be certified as Opportunity Zone Funds. While many details about the program remain to be determined, there is some urgency because each governor is required to designate Opportunity Zones by March 22, unless extended. The governor is only permitted to designate 25 percent of the low-income census tracts within the state as Opportunity Zones, which means that Governor Fallin will only be able to designate about 114 Opportunity Zone census tracts within Oklahoma.
Q: Are there other economic development incentives like this one?
A: Yes. The New Markets Tax Credit gives taxpayers a tax credit equal to 39 percent of qualified investments in low-income census tracts. The Opportunity Zone incentive is intended to complement the New Markets Tax Credit, and both tools could be used on the same project if all program requirements are satisfied. In addition, both the New Markets Tax Credit and the Opportunity Zone incentive could be used in tandem with the federal and state historic credit to rehabilitate historic buildings.
Q: If someone is planning a project in a low-income area, what should they do?
A: Be proactive now. The Opportunity Zones will be designated by Governor Fallin by March 22, and there’s no provision in the current law to change these designations in the future. Let your voice be heard by reaching out to your elected officials and advocating your project’s census tract as a designated Opportunity Zone. McAfee & Taft is assisting a number of cities, community development organizations and project developers to recommend census tracts for Opportunity Zone designation.
Q: Suppose a taxpayer is expecting to sell assets this year and have a significant gain. What should they do if they’d like to invest those proceeds into a low-income community?
A: Unfortunately, the federal government is not expected to issue regulations regarding the Opportunity Zone program for some time. It will likely be next year before Opportunity Zone Funds can be certified and investors can begin using the program. Since gains must be reinvested in an Opportunity Zone within 180 days to qualify for the incentive, consider delaying the sale of assets. You also can act now by letting your municipal government and local community development entities know that you are a potential investor in these types of projects.
Cheryl Vinall Denney is a business attorney with McAfee & Taft specializing in economic development law.