The Department of Treasury has published a 120 Page Report on General Explanations of the Biden Administration’s Fiscal Year 2023 Revenue Proposals. After reviewing this report it is apparent why so many wealthy individuals/families are turning to Opportunity Zones.
The Biden Administration wants to do the following:
Reform Business And International Taxation
- Raise The Corporate Income Tax Rate To 28%
- Adopt The Undertaxed Profits Rules
- Provide Tax Incentives For Locating Jobs In U.S.
- Remove Tax Deductions For Jobs Overseas
- Prevent Basis Shifting By Related Parties Through Partnerships
- Conform Definition Of Control With “Corporate Affiliation Test”
- Expand Access To Retroactive Qualified Electing Fund Elections
- Expand The Definition Of Foreign Business Entity To Include Taxable Units
Supporting Housing And Urban Development
- Make Permanent The New Markets Tax Credit
- Allow Selective Basis Boosts For Bond Financed Low Income Housing Credits Projects
Modify Fossil Fuel Taxation
- Eliminate Fossil Fuel Tax Preferences
- Modify Oil Spill Liability Trust Fund Financing And Super Fund Excise Taxes
SAVVY TAXPAYERS ARE TRANSFORMING BUSINESS GAIN TAXATION LEAD INTO GOLD. THEIR APPROACH IS FAR FROM “ORDINARY”.
- Treasury and IRS initially struggled regarding how to deal with IRC Section 1231 gains and losses in the context of the OZ program; however, the final OZ Regulations ended up being extremely taxpayer-friendly.
- Understanding how and why Treasury arrived at its decision unlocks a remarkable, yet brief, planning opportunity for taxpayers and their advisors.
- With the right planning, taxpayers can isolate gross 1231 gains for OZ reinvestment eligibility but still claim gross 1231 losses in the same year at ordinary income rates – resulting in permanent tax savings.
- Taxpayers who already reported net 1231 gains in tax years 2019 and 2020 can still likely make tax-advantaged QOF investments for those years—but the window is closing fast – especially for 2019 1231 gains.
- This ability to defer 1231 gain and recognize 1231 losses can further benefit certain taxpayers who would have otherwise been forced to pay ordinary rates on net 1231 gains in a given year as a result of the five-year “look-back” period under 1231(c).
Cryptocurrency continues to gain popularity both as an investment asset and as a means to pay for goods and services. The growing ease with which a person can buy, hold and sell cryptocurrency has resulted in an explosion in crypto transactions – and, in turn, has left taxpayers needing to account to the IRS for their newfound cryptocurrency gains (and losses).
This powerful trend reached a new peak in 2020 when, as a result of COVID-19 disruption, related worldwide economic uncertainty and entry of companies such as PayPal into the consumer market (allowing more than 300 million users to easily buy cryptocurrencies), the crypto-market witnessed a dramatic run-up in the values of Bitcoin and many other cryptocurrencies.
The Tax Cuts and Jobs Act included changes for businesses and individuals. One of these is the creation of the Opportunity Zones tax incentive, an economic development tool that allows people to invest in distressed areas. This incentive’s purpose is to spur economic development and job creation in distressed communities
by providing tax benefits to investors. Low income communities and certain contiguous communities qualify as Opportunity Zones if a state, the District of Columbia or a U.S. territory nominated them for that designation and the U.S. Treasury certified that nomination. Following the nomination process, 8,764 communities in all 50
states, the District of Columbia and five U.S. territories were certified as Qualified Opportunity Zones (QOZs). Congress later designated each low-income community in Puerto Rico as a QOZ effective Dec. 22, 2017. The list of each QOZ can be found in IRS Notices 2018-48 and 2019-42. Further, a visual map of the census tracts designated as QOZs may be found at Opportunity Zones Resources.
Benefits Of Investing In Opportunity Zones
HCVT tax partner Blake Christian was named as one of the Top 25 National Opportunity Zone (OZ) Influencers Overall and a Top 25 OZ Tax Specialist at the June OZ Expo Tax Conference. The OZ Expo parent OpportunityZone.com conducted its eighth OZ conference in a virtual format as a result of COVID. Blake was one of four CPAs who made both Top 25 lists along with fellow California CPA Michael Novogradac. In response to his honor, Blake states that “the OZ community is very appreciative of Ali Jahangiri and the OpportunityZone.com team for their leadership and the amazing OZ Expo speakers and panels they have provided over the years.” https://www.opportunityzone.com/posts/top-25-oz-influencers-2020/
Blake has specialized in various federal and state tax incentive programs for three decades and has been specializing in the OZ Program since the program’s 2017 adoption as part of the Tax Cuts and Jobs Act (TCJA). To date, HCVT has assisted clients with establishing over 100 Qualified Opportunity Funds (QOF), and Qualified Opportunity Zone Businesses (QOZB) comprised of hundreds of millions of dollars that are invested in real estate projects and operating businesses throughout the country. The OZ program has attracted a minimum of $10 billion of equity dollars through the first quarter of 2020. Still, in counting OZ fund dollars that have been invested into non-public funds such as family offices, the funding is likely closer to $40 – $50 billion based on panelists’ comments at the OZ Expo.
Blake credits this award to a variety of others: “While I am very honored and humbled by this recognition, my involvement in this transformative program is a result of numerous collaborations. My talented and hard-working HCVT OZ Team, my partners, and the many clients who were early adopters, as well as OZ attorneys and consultants who have supported our OZ practice.”
While the first set of Treasury Regulations and initial OZ statute primarily emphasized real estate projects as re-investment options, the final regulations clarified that operating businesses are also appropriate reinvestments for deferred gains.
Unsurprisingly, most of the early Qualified Opportunity Funds (QOFs) focused entirely on real estate projects. However, once regulations had been finalized, investors and advisors have grasped the full flexibility and power of the OZ program. Additionally, private investors, PE firms and VC firms have come to realize that using the OZ program for operating businesses may yield even more substantial long-term benefits than real estate investments — for investors as well as OZ communities.
SINGIFICANT OZ BENEFITS FOR ACTIVE BUSINESSES
Both the Trump Administration and QOF architects view the use of the OZ program as a valuable tax and economic development tool for operating businesses for the following reasons:
PORTLAND, Oregon, Sortis Holdings, Inc. (SOHI), a Portland, Oregon-based alternative investment fund manager, announces the launch of its sixth investment fund, the Sortis Distressed Opportunity Fund, which will look to capitalize on “once-in-a-cycle” real estate and business opportunities created as a result of the COVID-19 outbreak.
The Sortis team does not estimate a lengthy recession following the pandemic, but they do believe the crisis will have a deep enough impact on certain areas of the real estate market to create special situation opportunities. While the fund will remain asset class agnostic, the management team is eyeing a few particular areas within the real estate market initially.
The Sortis Distressed Opportunity Fund will look to acquire qualified distressed debt, physical real estate, and select operating businesses across the Western United States. This could include, but not limited to: failed projects, discounted performing & non-performing loans, foreclosures, bankruptcies, and other complex situations.
Building upon its existing fund family foundation, the Sortis team will continue its thematic approach into distressed opportunities, while maintaining a keen focus on capital preservation through built-in downside protection and safeguards.
Due to the newness and uniqueness of the Opportunity Zone (OZ) Program and the voluminous OZ regulations, there is a fair amount of inaccurate information floating around in the business community. Following is a non-exhaustive list of some of the more common misconceptions about this powerful federal tax program. Note that June 28th is the deadline for setting up a Qualified Opportunity Fund (QOF) and investing cash or property from most calendar 2018 capital gains. More details on the program can be found at:
- Only taxpayers with long-term capital gains can participate in the OZ Program.
- False: Short-term capital gains and net §1231 (trade or business asset) gains, § 1250 building depreciation recapture, capital gain dividend distributions, and a portion of certain “straddle” transactions can also qualify for Opportunity Zone (OZ) reinvestment. Unlike Internal Revenue Code (IRC) §1031 transactions, the OZ program can be used for real estate, tangible personal assets, bitcoin, art, collector cars, business sales, intangibles and stocks.