IRS Convenes Public Hearing on Proposed Regulations for Opportunity Zones

Jason J. Redd, a Director in the Gibbons Government & Regulatory Affairs Department, attended an overflowing public hearing on February 14 convened by the Internal Revenue Service for the purpose of obtaining input from stakeholders concerning the initial proposed regulations for Opportunity Zones (OZ) issued in October 2018. The IRS is reviewing this input and other comments on October’s proposed regulations and is expected to issue the next round of proposed regulations in March, with the potential for final regulations to be issued in late spring.

Witnesses testifying at the packed hearing included state cabinet officials, as well as representatives from state economic development groups, small businesses, community reinvestment coalitions, investment funds, and technology and planning organizations. Testimony focused on ensuring that program regulations maximize investment and economic growth by generating new development, capital, and jobs in the distressed communities where OZs are located.

There was also a clear call, by all in attendance, for clarity and flexibility in the next round of rules. Suggestions included: (i) modifying the rules to provide more flexibility to investors when exiting Qualified Opportunity Fund (QOF) investments, which is currently limited to a sale of the QOF investment itself; (ii) loosening restrictive sourcing and location rules for OZ business income; and (iii) allowing QOFs to reinvest interim gains within a reasonable time period without triggering a taxable event.

OZs have the potential to generate substantial tax savings for investors with capital gains and the ability to hold the investment for an extended period. Generally speaking, investors must select a QOF and invest the gains from the initial taxable sale within 180 days of the initial transaction. A QOF is a partnership or corporation established specifically to invest in businesses or properties within an OZ, which elects to be treated and qualifies as a QOF. The benefits of investment in a QOF are significant: (i) the deferral of taxation until December 31, 2026 on original capital gains which are reinvested into a QOF, as well as up to a 15% tax reduction (via basis increases) on the original gains; and (ii) tax-free appreciation of the investment (with no upper limit) if held in a QOF for at least 10 years, again by means of a basis step-up at exit.

There are OZs in every state and territory within the United States, including 169 zones in 75 New Jersey municipalities. A list of OZs can be found here.