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Current News Alert – May 2018

Opportunity Zones

The 2017 Tax Cuts and Jobs Act added a new economic development tool to incentivize long-term investment in designated low-income communities, known as Opportunity Zones. The incentives include:

  • temporary deferral of gain recognition from the sale of property if the gain is invested in a qualifying investment in an Opportunity Zone,
  • exclusion of up to 15% of the deferred gain, and
  • exclusion from gain of appreciation on the Opportunity Zone investment.

The Opportunity Zone incentives are available to any taxpayer, including individuals, corporations, partnerships, trusts or estates, and the potential gain deferral is not limited in amount.

Opportunity Zones are nominated by each state and designated by the Department of Treasury. As of May 18, 2018, Opportunity Zones have been designated in all but four states – Florida, Nevada, Pennsylvania and Utah. The designated tracts are accessible at www.cdfifund.gov/Pages/Opportunity-Zones.aspx.

Briefly, the Opportunity Zone incentive allows a taxpayer to temporarily defer gain realized from the sale of property to an unrelated person if the taxpayer invests such gain within 180 days in a “qualified opportunity fund” (QOF). The taxpayer is required to recognize the deferred gain on the earlier of the date of the taxpayer’s disposition of its investment in the QOF or December 31, 2026. In addition, up to 15% of the deferred gain may be permanently excluded from income. If the investment in the QOF is held for 5 years, the taxpayer’s basis in its investment in the QOF is increased by 10% of the deferred gain, and if held for 7 years, by an additional 5% of the deferred gain. If the taxpayer holds its investment in the QOF for 10 years, any appreciation in value of its investment is excluded from gain upon a sale of the investment.

A Qualified Opportunity Fund (QOF ) is a corporation or a partnership formed to invest in “qualified opportunity zone property” (QOZP) that holds at least 90% of its assets in QOZP. No action or approval by the IRS is required to form a QOF. IRS guidance issued April 24, 2018 (Opportunity Zones, Frequently Asked Questions) provides that a QOF self-certifies by filing a form attached to the QOF’s federal income tax return for the taxable year that is timely filed, including extensions. The IRS guidance states that the form will be provided by the IRS in the summer of 2018.

Generally, Qualified Opportunity Zone Property (QOZP) is tangible property acquired after December 31, 2017, directly by a QOF or through an equity investment in a partnership or corporation, if (i) the use of the property commences with the QOF or the property is substantially improved by the QOF and (ii) substantially all of the use of such property is in a trade or business in an Opportunity Zone.

Uses of the incentive include financing startups, business expansion, and real estate development. The Opportunity Zone incentive can be used by nonprofit organizations to attract private capital for investment by forming a joint venture, for example, to construct or substantially improve a community facility. The Opportunity Zone incentive may also be used to fill financing gaps for projects financed by other economic development tools, such as the low-income housing tax credit, new markets tax credit, and historic rehabilitation tax credit. Further guidance is required from the Department of the Treasury to fully utilize this incentive. For further information, please contact Ruth Sparrow.

2018 Round of NMTC Allocations Opens - $3.5 billion of NMTC Allocation Authority

On May 9, 2018, the CDFI Fund issued the Notice of Allocation Availability for the 2018 Allocation Round of the New Markets Tax Credit program. The NOAA describes the application process and provides various deadlines that must be met by applicants. The CDFI Fund also issued the 2018 Application FAQs, highlighting changes from the 2017 FAQs. The electronic application deadline is 5 pm Eastern on June 28, 2018. The CDFI Fund will review the status of the issuance of QEIs by the applicants for prior rounds as of September 24, 2018.

This Current News Alert has been prepared to provide readers with general information and should not be construed as legal advice. Readers should not act upon information in this publication without professional counsel. This material is not intended to create and receipt of it does not constitute a lawyer-client relationship. This material may be considered advertising under certain rules of professional conduct.

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