Businesses headquartered in Qualified Opportunity Zones have access to Qualified Opportunity Funds for sources of capital. These funds select Qualified Opportunity Zone Businesses to invest in based off an internal criterion that set forth.
DIFFERED, REDUCTION AND EXCLUSION OF CAPITAL GAINS
Qualified Opportunity Zone businesses receive the same tax treatment as Qualified Opportunity Zone Funds. These include a temporary deferral of capital gains reinvested in a Qualified Opportunity Zone Business, a step up in basis by 10% or 15% if the investment is held for 5 or 7 years, respectively, and a permanent exclusion of capital gains generated in a Qualified Opportunity Zone Business after a 10-year holding period.
GROSS INCOME SAFE HARBORS
A Qualified Opportunity Zone Business must derive at least 50% of its gross income from the active conduct of a trade or business within a Qualified Opportunity Zone. The proposed regulations from April 2019 provided significant relief by offering three safe harbors, of which a Qualified Opportunity Zone Business needs to satisfy at lease one, to satisfy the 50% gross income requirement.
1) 50% of the services performed by employees and independent contractors (based on hours performed) are performed in the Qualified Opportunity Zone.
2)50% of the amounts paid for services performed by employees and independent contractors are for services performed in the Qualified Opportunity Zone.
3) The tangible property of the Qualified Opportunity Zone Business located in the Qualified Opportunity Zone and the management or operational functions performed for the QO Business in the QO Zone are each necessary to generate 50% of the gross income of the QO Business.
ABILITY TO HOLD WORKING CAPITAL
The regulations announced in April 2019 by the IRS extended the ability to hold financial property, such as cash, for a period of up to 31 months while still meeting the 5% Financial Property Limitation. This guideline allows early-stage QOZ businesses to comply with the necessary requirements.
COLLABORATION & COMMUNITY INVOLVEMENT
Ultimately, the main objective of the Opportunity Zone program is to benefit the community through focused investment. Individual businesses now have an opportunity to participate in this through multiple means including; employment of people living in these communities, services provided to these residents by Opportunity Zone Businesses and agglomeration benefits that derive from having concentrated business activity.