Investing in Opportunity Act - PDF Free Download

Investing in Opportunity Act MODERATOR John Sciarretti Novogradac & Company LLP PANELISTS Joseph Bredehoft Husch Blackwell Jonathan Goldstein Advantage Capital Neil Faden Manatt, Phelps & Phillips LLP Steve Mount Squire Patton Boggs

IRC Section 1400Z Opportunity Zones The Tax Cuts and Jobs Act has established new Internal Revenue Code Section 1400Z - Opportunity Zones. This section allows any taxpayer to defer paying tax on capital gains from the sale of property if those gains are timely invested in Qualified Opportunity Funds (QOF) which in turn must invest 90% of its assets in businesses located or property used in a low income community.

Individual and Corporate Taxpayers make Timely Investments into Qualified Opportunity Funds which invest in Qualified Opportunity Zone Property

Period of Deferral The period of capital gain tax deferral ends upon the earlier of: The date the opportunity fund investment is sold or exchanged, or December 31, 2026

Amount Recognized The lesser of: The amount of gain deferred, or The fair market value of the investment Minus: The taxpayer s basis in the Opportunity Fund. The taxpayer s basis in the Opportunity Fund is initially deemed to be zero.

Partial Forgiveness Investments held at least 5 years: Basis increased by 10% of the deferred gain Up to 90% taxed Investments held at least 7 years: Basis increased by 15% of the deferred gain Up to 85% taxed

Forgiveness of Additional Gains Investments held longer than 10 years: Basis is equal to Fair Market Value Forgiveness of gains on appreciation of investment Requires a special election

Sample Investment On 1/1/18, Taxpayer enters into a sale that generates $1M of capital gain On 6/30/18 (within 180 days), Taxpayer contributes entire $1M of capital gain to a Qualified Opportunity Fund

Sample Investment - continued Taxpayer is deemed to have a $0 basis in its QOF investment QOF Invests the $1MM in Qualified Opportunity Zone Property

Sample Investment - continued On 6/30/23 (after 5 years), Taxpayer s basis in investment in QOF increases from $0 to $100k On 6/30/25 (after 7 years), Taxpayer s basis in investment in QOF increases from $100k to $150k

Sample Investment - continued On 12/31/26, $850K of the 1MM of deferred capital gains are taxed and the basis in QOF investment increases to $1MM. On 6/30/28 (after 10 years), Taxpayer sells its investment for $1.5MM. Basis in the investment is deemed to be FMV. The effect is no tax on appreciation in investment.

Qualified Opportunity Zones (QOZ) -NMTC low-income community census tracts designated by the chief executive officer of a state as a QOZ within 90 days of enactment (March 21, 2018). -Possible 30 day extension States include any possession of the U.S. and the District of Columbia

Qualified Opportunity Zones continued May not exceed 25% of the number of the low-income community census tracts in a State Exception: If total lowincome census tracts in a state are less than 100, may designate 25 tracts

Qualified Opportunity Zones - continued Contiguous tracts: Up to 5% of QOZ s designated may be contiguous tracts where the MFI does not exceed 125% of the MFI of the contiguous low income community -Must be certified by Secretary within 30 days of designation -Possible 30 day extension

Qualified Opportunity Zones - continued QOZs remain in effect for 10 years following designation.

Qualified Opportunity Fund Any investment vehicle organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property (other than another QOF).

Qualified Opportunity Fund Must hold at least 90% of assets in QOZP, Determined by the average of the percentage of QOZP held on: The last day of the first six month period of the fund s taxable year, and The last day of the fund s taxable year

Qualified Opportunity Zone Stock Qualified Opportunity Zone Partnership Interest Qualified Opportunity Zone Property (QOZP) Qualified Opportunity Zone Business Property

Qualified Opportunity Fund Failure to meet 90% investment standard The fund must pay a penalty for each month it fails to meet the 90% requirement equal to the shortfall multiplied by the underpayment rate (Federal short-term rate plus 3%) No penalty if it is shown failure is due to reasonable cause

Qualified Opportunity Zone Businesses (QOZB) A trade or business in which substantially all of the tangible property owned or leased by the taxpayer is qualified opportunity zone business property (QOZBP)

Qualified Opportunity Zone Businesses (QOZB), cont At least 50% of income derived from Active Conduct Substantial portion of intangible property used in active conduct of business < 5 percent unadjusted basis of property is nonqualified financial property

Qualified Opportunity Zone Businesses (QOZB), cont Can t be a Sin Business A private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.

Qualified Opportunity Zone Business Property (QOZP) Tangible property used in a trade or business of a taxpayer Acquired by purchase from an unrelated party (20% standard) During substantially all of the taxpayer s holding period, substantially all of the use of the such property was in a QOZ Original use of such property in the QOZ commences with the taxpayer OR Taxpayer substantially improves the property (30 month rule)

OPPORTUNITY ZONE - REAL ESTATE 7 YEAR CONCEPT MODEL Depreciation Inv. Savings 1 Earnings Tax Sale OZ Exempt Exit Tax Net 0 (3,810,000) - - - - - - (3,810,000) 1-308,333 500,000 (185,000) - - - 623,333 2-308,333 515,000 (190,550) - - - 632,783 3-308,333 530,450 (196,267) - - - 642,517 4-308,333 546,364 (202,154) - - - 652,542 5-308,333 562,754 (208,219) - - - 662,869 6-234,333 579,637 (214,466) - - - 599,505 7-234,333 597,026 (220,900) 5,970,261 178,500 (2,779,256) 3,979,966 (3,810,000) 2,010,333 3,831,231 (1,417,556) 5,970,261 178,500 (2,779,256) 3,983,515 15.59% Depreciation Deferral No Deferral Inv. Savings 1 Earnings Tax Sale OZ Exempt Exit Tax Net Add'l Rtn % Increase 0 (5,000,000) - - - - - (5,000,000) 1,190,000 1-308,333 500,000 (185,000) - - 623,333-2 - 308,333 515,000 (190,550) - - 632,783-3 - 308,333 530,450 (196,267) - - 642,517-4 - 308,333 546,364 (202,154) - - 652,542-5 - 308,333 562,754 (208,219) - - 662,869-6 - 234,333 579,637 (214,466) - - 599,505-7 - 234,333 597,026 (220,900) 5,970,261 - (1,589,256) 4,991,466 (1,011,500) (5,000,000) 2,010,333 3,831,231 (1,417,556) 5,970,261 - (1,589,256) 3,805,015 178,500 11.41% 4.18% 36.66% NPV of Additional Return @ 10% 609,946 Percentage of Inv. 12.20% 1 Assumes lower- tier debt basis attributed to upper-tier is sufficient basis to absorb losses Assumptions: Capital Accounts Gain $5,000,000 Deferral No Deferral Capital Tax Rate 23.80% 0-5,000,000 Tax $1,190,000 1 (833,333) 4,166,667 OZ Exemption 15.0% 2 (1,666,667) 3,333,333 Ordinary Tax Rate 37.0% 3 (2,500,000) 2,500,000 Depreciation Recapture Tax Rate 25.0% 4 (3,333,333) 1,666,667 5 (4,166,667) 833,333 6 (4,800,000) 200,000 7 (5,433,333) (433,333) 1

OPPORTUNITY ZONE - REAL ESTATE 10 YEAR CONCEPT MODEL Depreciation Inv. Savings 1 Earnings Tax Sale OZ Exempt Deferral Tax ExitTax Net 0 (3,810,000) - - - - - - (3,810,000) 1-308,333 500,000 (185,000) - - - 623,333 2-308,333 515,000 (190,550) - - - 632,783 3-308,333 530,450 (196,267) - - - 642,517 4-308,333 546,364 (202,154) - - - 652,542 5-308,333 562,754 (208,219) - - - 662,869 6-234,333 579,637 (214,466) - - - 599,505 7-234,333 597,026 (220,900) - - - 610,460 8-234,333 614,937 (227,527) - - - 621,744 9-234,333 633,385 (234,352) - 178,500 (1,190,000) (378,134) 10-234,333 652,387 (241,383) 6,523,866 - - - 7,169,203 (3,810,000) 2,713,333 5,731,940 (2,120,818) 6,523,866 178,500 (1,190,000) - 8,026,821 18.29% Depreciation Deferral No Deferral Inv. Savings 1 Earnings Tax Sale OZ Exempt Deferral Tax ExitTax Net Add'l Rtn % Increase 0 (5,000,000) - - - - - (5,000,000) 1,190,000 1-308,333 500,000 (185,000) - - 623,333-2 - 308,333 515,000 (190,550) - - 632,783-3 - 308,333 530,450 (196,267) - - 642,517-4 - 308,333 546,364 (202,154) - - 652,542-5 - 308,333 562,754 (208,219) - - 662,869-6 - 234,333 579,637 (214,466) - - 599,505-7 - 234,333 597,026 (220,900) - - 610,460-8 - 234,333 614,937 (227,527) - - 621,744-9 - 234,333 633,385 (234,352) - - 633,366 (1,011,500) 10-234,333 652,387 (241,383) 6,523,866 - - (2,196,013) 4,973,189 2,196,013 (5,000,000) 2,713,333 5,731,940 (2,120,818) 6,523,866 - - (2,196,013) 5,652,308 2,374,513 11.89% 6.40% 53.82% NPV of Additional Return @ 10% 1,461,530 Percentage of Inv. 29.23% 1 Assumes lower- tier debt basis attributed to upper-tier is sufficient basis to absorb losses Capital Accounts Assumptions: Deferral No Deferral Gain $5,000,000 0-5,000,000 Capital Tax Rate 23.80% 1 (833,333) 4,166,667 Tax $1,190,000 2 (1,666,667) 3,333,333 OZ Exemption 15.0% 3 (2,500,000) 2,500,000 Ordinary Tax Rate 37.0% 4 (3,333,333) 1,666,667 Depreciation Recapture Tax Rate 25.0% 5 (4,166,667) 833,333 6 (4,800,000) 200,000 7 (5,433,333) (433,333) 8 (6,066,667) (1,066,667) 9 (1,700,000) (1,700,000) 10 (2,333,333) (2,333,333)

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