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.
Location and Property Requirements
To qualify and own a business as a QOZB, the regulation calls for a requirement on the type of property and location in which a property is placed. Unlike QSBS, QOZB requires certain criteria the qualified business must meet in order to satisfy the QOZ property requirements. The program was created to encourage investors to help revitalize the economy and create growth. Opportunity Zones are limited to specific economically-challenged census tracts spread across the country, and investors are incentivized to locate their businesses in these locations in exchange for tax exclusions.
What is the Rule and Where can it be Found?
The rules specifying a QOZB’s Location and Property Requirements may be found in 1.1400Z2(d)–2 of Section 13823 in the TCJA.The IRS requires Form 8966 to be filed annually by a corporation or partnership, certifying the company is organized to invest in a QOZ property by way of a QOF.
In a fact sheet published by the IRS, the rules defining location and property requirements provide more clarity.
As stated previously, there are 8,764 opportunity zones in all 50 States, the District of Columbia and 5 U.S. Territories. There are two IRS Notices, 2018-48 and 2019-42 which list every census tract approved by Congress and designated as an Opportunity Zone. In order for a business to claim QOZB eligibility, the business must meet all mandatory operating requirements and be located within properties identified in the above documents.
The first question that should be asked, what is a QOZ Property? A QOZ Property is an ownership interest by a QOF within a partnership or corporation that is organized as a QOZB. Another version of QOZ Property is some intangible property that is owned by a QOF being used within a QOZB trade or activities inside a QOZ. Now in order to have some qualifying ownership interest—as what a QOF would have—in the QOZB organized as a partnership or corporation,
- Said interest would have to have been exchanged for cash and acquired after Dec. 31, 2017;
- Said corporation or partnership has to have met the QOZB requirements; and
- The corporation or partnership would have to be a QOZ business for at least 90% of the interest’s holding period
When determining property eligibility, the IRS states,
QOZ business property is tangible property that a QOF acquired by purchase after 2017 and:
- Being used in a trade or business of the QOF or in a QOZ business;
- Has been purchased after December 31, 2017;
- “The original use of the property in the QOZ commenced with the QOF or QOZ business” OR
the property itself has been substantially improved by the QOF or QOZB; and
- During 90% of the time the QOF or QOZ business held the property, substantially all (generally at least 70 percent) of the use of the property was in a QOZ
Furthemore, when the requirements state “the property itself has been substantially improved,” the IRS has intended the language to represent,
“During any 30-month period beginning after the property is acquired, additions to the basis of the property exceed an amount equal to the adjusted basis at the start of the 30-month period.”
How are these Requirements Similar to QSBS?
As indicated above, the requirements distinguishing a property as a QOZB property are based on whether a small business is located within one of the over 8700 Opportunity Zones. A small business may qualify as QSBS, if other QSBS requirements are met, but is not limited to operating in a specific location like a QOZB property. There are no specific location requirements for QSBS. To maximize the tax benefits of both programs, it is possible for a QSBS business to also be a QOZB, if the qualified small business is located in one of the federally-recognized Opportunity Zones.
Is Your Company QOZB-Eligible?
In order to determine if your company is QOZB-eligible, it is important to make sure all requirements are met, including the specific Opportunity Zone location requirements. A comprehensive list showing the number of qualifying opportunity locations by state and territory may be found here. This interactive map shows where each Opportunity Zone is located. A property located in one of these areas that also meets these additional QOZB requirements would be QOZB-eligible.
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 related to the property requirements. Contact us for more information.