What Will it Take to Get OZ Participants off the Sidelines?
The Internal Revenue Service (IRS) has moved one step closer to releasing long-awaited guidance on the Opportunity Zones (OZ) incentive. On Sept. 12, the IRS sent proposed OZ regulations to the Office of Information and Regulatory Affairs (OIRA), a division of the White House Office of Management and Budget (OMB). There are timelines both OIRA and OMB follow—the earliest we could have seen guidance provided would have been 10 business days after the IRS submission but since that date has passed, OIRA generally has 45 days after submission to complete its review of Treasury regulations, according to a Treasury and OMB memorandum. In the meantime, potential investors are planning their next steps. Novogradac started identifying areas where more direction was needed early on. Novogradac’s Opportunity Zones Working Group has submitted two guidance requests letters thus far that outline what the group believes is needed to get potential participants off the sidelines and into the action. Novogradac, like others, has been working to understand and interpret the OZ provisions, and disseminate this information, and with interim guidance expected by the end of October, now is the time to reassess where things stand and what the next steps should be.
What Might be Holding Participants Back
From the enactment of the incentive with tax reform late last year, to the first programmatic milestone, the early months of the incentive has been a sprint for stakeholders to educate themselves about OZ, decipher what the regulations mean and devise and initiate plans on how they will participate. For example, there was only a 90 day period in which governors had to select qualified OZs from eligible census tracts, though states were able to request a 30 day extension, and a number did. The rush is not over—other important dates include the end of 2019, the deadline by which equity investments must be made if investors are to realize the full benefits of the 15 percent tax basis “step up” available to Opportunity Fund investments held for at least seven years.
On two separate occasions this year the Novogradac OZ Working Group addressed Treasury and the IRS, first identifying numerous items requiring additional guidance and then providing a letter with a more narrow focus, looking at those issues the working group thought were both hindering investment in opportunity zones and were readily addressable by the IRS on its FAQs page.
The groups’ initial letter to IRS detailed four major areas of concern:
- Guidance on whether a taxpayer can benefit from the 10-year holding period election to increase investment basis to fair market value when opportunity fund property is sold before a taxpayer sells his/her investment;
- Guidance on the definition of the “active conduct” of a business for purposes of a qualified OZ business;
- Guidance on whether an established low-income community business can qualify as a qualified OZ business; and,
- Guidance on the meaning of “sale or exchange” for the purpose of the end of the deferral period.
The working group’s second letter took a more focused approach, highlighting items that the group believes were easily addressed and would provide stakeholders with the information necessary to move forward with investments. These issues were divided into five sections:
- Gains eligible for deferral;
- Application of OZs to partnerships;
- Qualification of temporary cash reserves;
- Qualification of OZ businesses; and,
- Tax implications of debt.
It should be noted that quite a few opportunity funds have already been established based on the not all-inclusive listing posted online at www.opportunityzonesresourcecenter.com. Still, while there are those who may be able to move forward more quickly because they can weather potential pitfalls that the lack of guidance may cause—other stakeholders may be biding their time, and waiting for more concrete guidance before moving forward. Because the pending guidance is likely not to address all relevant issues, investors may still have unanswered questions upon its release. Novogradac anticipates the pending initial guidance will be interim, with a 60-day public comment period and final guidelines expected will be issued by the IRS before the end of the year, after it considers the public comment. The guidance to be released shortly may be enough to encourage those taking a more mission-driven approach but that remains to be seen. Still, with the clock ticking and various deadlines looming, potential participants cannot wait too long.