On Thursday, February 14, the IRS held a public hearing on Qualified Opportunity Zones (QOZ), seeking input relating to the first round of proposed rulemaking for the program, released in October 2018. (The hearing was originally scheduled for January, but had to be rescheduled due to the partial government shutdown.) Witnesses included representatives from state economic development groups; technology, small business, and community reinvestment coalitions; economic think tanks; and several investment funds. Despite the broad range of interests represented by the witnesses, there were several common themes and points that the witnesses made to the IRS panel:
- Requirements for Qualified Opportunity Zone businesses: The proposed rules outline that a QOZ business must be at least 70% within a QOZ to qualify, but it also states that at least 50% of gross income receipts must be from business within a QOZ. Concerns were raised about businesses that conduct e-commerce or manufacturing, which may struggle to meet that standard.
- Flexibility for Opportunity Funds to reinvest interim gains without penalty: Several groups raised the point that investment funds thrive on flexibility and diversity, and that locking funds into their investments, including any gains they make, for at least 10 years runs counter to that. Instead, it was suggested that the IRS should allow Opportunity Funds to reinvest gains within a reasonable time in other Opportunity Zone Businesses without triggering a taxable event.
- Data reporting requirements: Witnesses asked that the IRS provide clear data-reporting requirements for Opportunity Funds and QOZ businesses, to serve several purposes: provide a transparent mechanism for tracking the program’s effectiveness; help funds and investors make well-informed decisions; and prevent fraud and abuse.
- Protections and incentives for affordable housing: Most of the census tracts the states nominated to be QOZs go beyond the statutory requirements for income levels, and actually qualify as “severely distressed” communities. As such, several groups urged the IRS to consider protections for current residents and existing businesses in QOZs, including protections for existing affordable housing and incentives to develop more.
- Interactions with other tax incentives: The IRS was asked to clarify exactly how the QOZ program and its tax benefits will work with other existing tax benefits meant to encourage development, such as the New Market Tax Credit and the Low Income Housing Tax Credit.
- “Substantial improvement” definition: In the proposed rules, the IRS states that a property is substantially improved if investments into it are worth at lest the cost of hte property, not including the basis of the land it is on. Witnesses asked if this could be aggregated between multiple properties in a QOZ invested in by a single Opportunity Fund, and also requested that more flexibility be built into the program for the time-period in which a property can be “substantially improved” (the proposed rules allow 30 months).
The hearing garnered much interest among the various stakeholder communities, and overall the witnesses spoke optimistically about the QOZ program and its potential to help distressed areas by bringing new development, capital, and jobs to their communities. The IRS panel stated that they are continuing to review the comments on the first round of proposed rules and that a second round is expected “shortly.” Optimistically, final regulations are expected in late Spring 2019.
For more information, visit the Qualified Opportunity Zones page.
More on Opportunity Zones including videos, presentations, resources HERE.