Since its initial appearance as a meager six pages of the Tax Cuts and Jobs Act of 2017, the IRS has released two sets of proposed regulations with almost 250 pages of guidance about Qualified Opportunity Zones (QOZ) and Qualified Opportunity Funds (QOF). The most recent set of proposed regulations, released April 17, 2019, provide much-needed guidance and clarity that taxpayers and their advisors sought. Today, we touch on five (5) key highlights of the proposed regulations:
The definition of “substantially all” for the holding period and use of business property in QOZs:
For use of the property, 70% or more must be used in a QOZ.
For the holding period of the property, tangible property must be QOZ business property for at least 90% of the QOF’s or QOZ business’s holding period.
The partnership or corporation must be a QOZ business for at least 90% of the QOFs holding period.
Three safe harbors and a facts-and-circumstances test for determining whether enough income is generated from an operating business in a QOZ to meet the 50% test. The safe harbors are:
50% or more of the services performed, based on hours, by its employees and independent contractors are performed within the QOZ.
50% or more of the amounts paid by the trade or business for services performed by employees and independent contractors are in the QOZ.
The tangible property of the trade or business located in a QOZ, and the management or operational functions performed for the business in the QOZ, are each necessary to generate at least 50% of the gross income of the trade or business.
A QOF partnership can make tax-free, debt-financed distributions if the distributions are not in excess of the taxpayer’s basis, including their share of the liability. The proposed regulations limit the ability to make these distributions without impacting the QOF investment if the distribution is within two years of the investment.
A transfer of an investment in a QOF at death is not taxable and the recipient inherits the decedent’s holding period.
Buildings in QOZs vacant for more than five years can be considered original-use property, if the QOZ tests are met.
Thanks to the new QOZ proposed regulations, taxpayers and their advisors can be more comfortable making investments in QOZs. The Tax Warriors® at Drucker & Scaccetti are well versed in the nuances of the program and can help you understand how you may benefit. Contact us today to discuss your options. You can also visit our comprehensive online QOZ Resource Center.