Opportunity Zone Legislative Update Effective June 1, 2021

The IRS has been busy releasing updates regarding the Opportunity Zone program (OZ), and the HCVT OZ Team wants to keep you informed on all the latest OZ news.

Most importantly, the Biden Administration is continuing to support the program. This comes as no surprise, considering the architects of the 2018 program came out of the Obama Administration. We do anticipate a few OZ program refinements this year, but no major overhaul. The legislative program updates we anticipate are summarized below, in Exhibit A. For the most part, these changes will be beneficial to investors.

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IRS Notice 2021-10 Provides Additional Short-term Relief For Qualified Opportunity Fund Requirements

As a result of the continuing COVID-19 impact on businesses and individuals the IRS released a second Notice (IRS Notice 2021-10) on January 19, 2021 to provide Opportunity Zone (OZ) investors with additional time to roll capital gains into a Qualified Opportunity Fund (QOF), as well as additional time to make “substantial improvements” to acquired property and additional time to acquire Qualified Opportunity Zone Business Property (QOZBP).  This Notice follows the June 2020 Notice 2020-39 which extended various 2019 and 2020 OZ Program deadlines and testing dates – generally through December 31st. The extended relief under 2021-10 is generally through March 31, 2021.

Details of the relief given by Notice 2021-10 are outlined below:

  • 180-day investment period.Previously, Notice 2020-39 had postponed the investment period to December 31, 2020. Notice 2021-10 further postpones the last day of the 180-day investment period to March 31, 2021, if the last day of the original 180-day investment period fell on or after April 1, 2020

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IRS Notice 2021-10 Provides Additional Short-term Relief For Qualified Opportunity Fund Requirements

As a result of the continuing COVID-19 impact on businesses and individuals the IRS released a second Notice (IRS Notice 2021-10) on January 19, 2021 to provide Opportunity Zone (OZ) investors with additional time to roll capital gains into a Qualified Opportunity Fund (QOF), as well as additional time to make “substantial improvements” to acquired property and additional time to acquire Qualified Opportunity Zone Business Property (QOZBP).  This Notice follows the June 2020 Notice 2020-39 which extended various 2019 and 2020 OZ Program deadlines and testing dates – generally through December 31st. The extended relief under 2021-10 is generally through March 31, 2021.

Details of the relief given by Notice 2021-10 are outlined below:

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Year-End Tax Planning In A Year Of Political Uncertainty

Cash basis taxpayers have a large number of ways to control their 2020 reported taxable income which is even more important this year since we may be moving from historically low tax rates to much higher rates post-2020.

While a Biden victory appears fairly certain, we find ourselves in the position of not knowing whether the Democrats or Republicans will be controlling the Senate.  The two federal Senate seats in Georgia will not be determined until January leaving us with significant tax planning uncertainty.  These seats are unsettled since neither candidate won over 50% of the votes cast. The Republicans just need one of these seats to control the Senate, while the Democrats must win both seats.

Senate control is critical to determining whether the Biden Administration will be able to push though their promised tax increases (see attached summary) including increasing ordinary tax rates (from 37% to 39.6%) and long-term capital gain rates (from 23.8% to 39.6%) for taxpayers with more than $400,000 and $1,000,000, respectively, of taxable income.

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Relief For Qualified Opportunity Funds And Investors Affected by Ongoing Coronavirus Pandemic

The key components of Notice 2020-39 (issued 6/04/2020) are listed below:

  • This notice extends the termination date of the 180-day reinvestment period. The termination of the 180-day reinvestment period would otherwise end between April 1, 2020, and December 31, 2020, will now have until December 31 to fund the Qualified Opportunity Fund (QOF). The prior COVID extension was July 15, under Notice 2020-23.
    1. There are significant 2019/2020 long-term tax planning opportunities and a unique situation where a taxpayer might file a return (current extended due date – October 15) before funding their QOF. Amended returns will be allowed if the taxpayer had not estimated the funding amount before filing their return.
    2. This extension will avoid complications associated with the early adoption of the Final Regulations for taxpayers with pre-March 15th, 2020 gains.

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The Top 10+ Things You Need to Know About The 180-Day OZ Reinvestment Rule

On January 13, 2020 the U.S. Department of Treasury published Final Regulations for the Opportunity Zone (OZ) program – a full two years after the powerful and flexible OZ program was implemented as part of the 2017 Tax Cuts and Jobs Act. The Final Regulations were widely applauded following much controversy and public input over the first two rounds of Proposed Regulations that had been released on October 29, 2018 and April 17, 2019.

The several hundred pages of preamble and the text of the Final Regulations certainly have varying levels of complexity, but clearly one of the more challenging areas for OZ investors is determining exactly when the 180-day reinvestment period begins and ends. Taxpayers who get this wrong will completely miss out on the best tax program in decades. A situation you won’t want to be in the middle of.
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Blake Christian Opportunity Zone Program

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.  More details on the program can be found at https://www.hcvt.com/services-Federal-Qualified-Opportunity-Zone.html.

1) 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.

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Blake Christian

What you need to know about corporations, partnerships and other structures under which you do business

Key Takeaways:

  • There are six widely used business operating structures. Each has pros and cons depending on the owner’s income and estate planning options.
  • Choosing the right legal form for your business is critical for both legal and tax purposes
  • The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) made significant changes that should be factored into your entity choice.

As many of you know, The 2017 Tax Act made significant changes to the tax code. Most significantly individual tax rates have dropped and now cap out at 37 percent (vs. prior 39.6 percent). Here are some of the other highlights:

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Blake Christian On Opportunity Zones

Taxpayers wishing to participate for any calendar 2018 capital gains must act quickly.

The Opportunity Zone (OZ) Program, ushered in as part of the 2017 Federal Tax Cut & Jobs Act, includes one of the most powerful and flexible tax planning provisions in decades.  The Program allows taxpayers who are generating capital gains from real estate sales, stock sales, artwork, Bitcoin, vehicles, intangibles and most other assets to roll over all or a portion of the gain into a Qualified Opportunity Fund (QOF) and achieve the following benefits:

  • Defer reporting the initial tax gain until December 2026.
  • Earn a 10% tax basis increase in their QOF investment in Year Five and another 5% increase in Year Seven – resulting in a permanent tax reduction.
  • Most importantly, gains accruing after the investment into the QOF will be 100% tax-free upon sale if the investment is held for at least 10 years.

The challenge for many is to roll those gains within 180 days from when the tax gain is reportable. As a result, action must be taken no later than June 28th, 2019 to participate in the OZ Program for any eligible calendar 2018 tax gains.

 Two important ways to participate while window of Opportunity is still open

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Blake Christian On OZ Program

The Opportunity Zone (OZ) Program has been around for almost 18 months now but as a result of complexities and open issues on exactly how taxpayers would participate and benefit, the program is now getting national traction and investment dollars. The OZ Program is the most powerful investment and diversification and economic development tool I have seen in four decades of tax consulting.

The OZ Program borrows elements from other long-standing tax provisions –

-Internal Revenue Code Section(IRC) 1031(Like Kind Exchange) which allows taxpayers to defer taxes on properly structured real estate swaps,

-Roth 401K’s/IRAs which allow taxpayers to build-up tax-exempt income after holding the Roth Account for at least five years, and

-The Federal New Market Tax Credit Program

In summary, the OZ Program allows taxpayers to rol over all or a portion of capital gains (long or short-term) income into a Qualified Opportunity Fund (QOF). The invested funds can then be deployed into real estate or an active business located in one of the 8,700 qualifying census tracts throughout the U.S. and U.S. territories. Following these steps allows the taxpayer to defer the tax on their original capital gain until December 2026. Depending on when the taxpayer rolls their gain, they may also be eligible for a reduction in their reportable gain of 10% to 15%.

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Blake Christian Opportunity Zones

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:

https://www.hcvt.com/services-Federal-Qualified-Opportunity-Zone.html

  1. 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.

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Blake Christian - Tax Credits And Incentives
Hiring Tax Credits

An abundance of Federal and California hiring tax credits can offset your tax liability on a dollar-for-dollar basis.

Is your business potentially missing out on significant tax refunds which can offer you enhanced cash flow and a competitive advantage? Numerous federal and state tax hiring tax credits and incentives can offset your tax liability on a dollar-for-dollar basis. Any missed credits for past years can be secured via amended returns for at least the past three years, and to the extent the credits cannot be used in the prior or current year, liberal carryover rules generally apply. Federal and California hiring tax credits are abundant and should never be overlooked by those who have the potential to take advantage of them.

The significance of hiring tax credits is especially true for businesses when hiring employees. There are over 8,500 tax incentive zones throughout the country which generally allow employers to claim credits for a percentage of wages paid to employees meeting certain criteria at the time of hire. Which hiring tax credit and other incentive programs you qualify for.

Hiring Tax Credits Available to You

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