To operate a business in a Qualified Opportunity Zone (QOZ), certain criteria must be met to be designated as a Qualified Opportunity Zone Business (QOZB). Opportunity Zones were established under the Tax Cuts and Jobs Act (TCJA) of 2017.
The legislative intent behind this enacted tax code was to stimulate economic growth by incentivizing new, old, small, or even large organizations to establish their businesses within a designated zone. What is the incentive? In exchange for investing in these locations, taxpayers are offered deferred tax benefits based on the duration of time the business is owned or leased within the designated QOZ.
There are currently 8,764 designated opportunity zones. The governors of each state and territory nominated opportunity zone locations that have been approved by the US Treasury as qualified opportunity zones. Section 13823 of the TCJA includes section 1400Z-1, which identifies these specific census tracts as eligible qualified opportunity zones.
Entity Type Requirement
Similar to QSBS, QOZB has an entity type requirement. QOZB allows for a broader view when analyzing the entity type eligibility. Both C-Corporations and S-Corporations are eligible under the QOZB requirement. The entity can also be a partnership and an LLC taxed as either a corporation or partnership will satisfy the entity requirement.
What Determines a QOZB’s Entity Type?
The rules specifying a QOZB’s Entity Type requirement may be found in 1400Z2(d)-1(a)(1)-(ii) of Section 13823 in the TCJA. The rule states,
“Except as provided in paragraph (a)(1)(ii) of this section, the term eligible entity means an entity that is classified as a corporation or partnership for Federal income tax purposes.”
This language broadens the scope of what entity type may qualify for tax benefits through Opportunity Zones. However, there is a second part to the clause which, in order to be treated as a Qualified Opportunity Zone Fund, the qualified entity type must satisfy the “valuation of property for purposes of the 90–percent investment standard and the 70–percent tangible property standard.”
Qualified Opportunity Zone Property and the Qualified Opportunity Zone Business clauses and requirements also have additional criteria related to entity type. Learn more about these requirements.
How Does this Compare with QSBS?
Unlike QSBS, QOZB allows S-Corporations to be able to claim the tax benefit from opportunity zones because they meet the eligible entity type. However, there are also similarities, QSBS and QOZB allow for an LLC to be taxed as a C-Corporation, as well as allow both C-Corporations and partnerships to qualify for the tax benefits.
QOZB Entity Type Summary
In order to determine if your business qualifies as QOZB-eligible, the entity requirement must be met. The following steps can help assess if your company meets the entity type criteria needed:
- First, you must recognize whether your company is a partnership or a corporation.
- Second, if your company is a partnership or a corporation, then the entity type requirement is met. If the qualified business is not, look to see if it is an LLC.
- If it is an LLC, the best option is to convert to a C-Corporation. However, an LLC may qualify if it were to be taxed as a corporation or partnership.
Does your Business Meet these Requirements?
At CapGains, our QOZB Experts are here to help answer any questions you may have about your business’s QOZB eligibility and can answer any questions pertaining to the entity type. Contact us for more information.