Q&A WITH CH­ERYL VINALL DENNEY

The Oklahoman - - RETAIL -

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.

PAULA BURKES,

BUSI­NESS WRITER

Ch­eryl Vinall Denney is a busi­ness at­tor­ney with McAfee & Taft spe­cial­iz­ing in eco­nomic devel­op­ment law.

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