New Program in Tax Reform Bill Provides Investment Capital for Businesses and Developments in Low-Income Opportunity Zones
Governor Bryant To Designate Up to 100 Census Tracts as Opportunity Zones by March 21
- A provision in the new tax reform bill provides the potential for significant tax savings on realized capital gains that are rolled into new investment vehicles known as Qualified Opportunity Funds. Tax incentives include a deferral of taxes on those gains until December 31, 2026 (or earlier, if the investment is sold), a step-up in basis of the capital gain of up to 15% if the fund investment is held for at least 7 years, and exclusion of all gains from the Opportunity Fund if it is held for at least 10 years.
- Certain low-income census tracts, and certain contiguous tracts, are eligible for nomination as Opportunity Zones, and businesses, developers and other entities holding tangible property or real estate in these zones are eligible to receive investment capital from these Opportunity Funds.
- Each state’s governor is instructed to nominate eligible census tracts by March 21, 2018. Governor Bryant can nominate up to 100 of these zones in Mississippi. Business, healthcare entities, developers and other interested parties are urged to contact their local municipal leaders to encourage them to apply through the Mississippi Development Authority’s online application portal.
The Tax Cuts and Jobs Act, signed into law by President Trump on December 22, 2017, includes an innovative new community development tax incentive known as the Opportunity Zones Program. This program is designed to drive long term investment in business and commercial development in low-income urban and rural communities by using tax incentives to encourage private investment of capital gains in new investment vehicles known as Qualified Opportunity Funds.
U.S. investors are eligible to receive a deferral of capital gains tax and other benefits when they rollover realized capital gains into these Qualified Opportunity Funds. These funds will be authorized to invest in certain assets located in Opportunity Zones— mostly low-income census tracts to be nominated by each state’s governor and certified by the U.S. Treasury Department.
Due to the broad base of both potential investors and eligible developments, this program has great potential to spur investment and economic development in low-income communities throughout Mississippi. Through these significant tax benefits, the program looks to attract substantial amounts of capital which could be available to provide financing for entities with interests in commercial property and developments in these Opportunity Zones. Mississippi business and developers should be aware of this important legislative program, the opportunities it presents, and the steps they can take to maximize their ability to benefit from the program.
Tax Incentives for Investment
The Opportunity Zone Program encourages U.S. investors to reinvest their realized short- or long-term capital gains from stock portfolios, mutual funds and other holdings into Qualified Opportunity Funds. All capital gains rolled over into these funds within 180 days are eligible for significant tax benefits, including deferral of tax on these gains, increase/step-up in basis of these gains, and an outright exclusion from gross income of any gains on the sale of the investment in the fund.
- Deferral of Capital Gains Tax
Taxpayers pay no upfront tax bill in the year they roll over capital gains into Opportunity Funds. Taxes on these gains may be deferred until December 31, 2026, at latest, or until they sell their Opportunity Zone investment, if earlier.
- Step-Up in Basis
If the investment is maintained in the Opportunity Fund for five years, the taxpayer will receive a step-up in basis equal to 10 percent of the original gain. If the investment is maintained in the Opportunity Fund for seven years, the taxpayer will receive an additional 5 percent step-up in basis, for a total of 15 percent.
- Opportunity Fund Gains Nontaxable
For investments held for at least 10 years, all capital gains earned from the sale of an Opportunity Zone investment are nontaxable
From Opportunity Funds to Opportunity Zones
“Qualified Opportunity Funds” are a new class of investment tool that will be eligible for certification by the Treasury Department and tasked with aggregating private investment and deploying that investment into Opportunity Zones to support commercial projects, businesses and developments in these zones. The law does not limit the number of funds that can be created or restrict the nature of or potential risk/return on investments. The funds must maintain at least 90 percent of their assets in “qualified opportunity zone property,” which amounts to tangible business property (including commercial buildings, healthcare facilities, equipment, and multi-family complexes), or corporate stock or partnership interests in a business with substantially all its holdings in the same tangible business property, that is new or substantially improved in Opportunity Zones. (Certain disfavored businesses will not qualify, such as casinos and massage parlors.)
The program’s “Qualified Opportunity Zones” will be designated through nomination by each state’s governor, and subsequent certification of the zone by the Treasury Department. Generally, census tracts are eligible for nomination if they are “low income communities” under the same criteria as in the New Markets Tax Credits program—tracts with an individual poverty rate of at least 20 percent and median family income of no greater than 80 percent of the area median. Certain nonqualifying tracts contiguous to low-income communities may also be nominated. View the Mississippi Development Authority (MDA)’s helpful map of eligible tracts.
Governors will determine which eligible tracts in their states qualify as “Opportunity Zones” and may only nominate 25 percent of the total number of eligible tracts per state. In Mississippi, Governor Bryant may nominate up to 100 census tracts of the 399 eligible tracts in the state. Opportunity Zone designations last for a period of 10 years.
Next Steps; Governor’s Designation
Governor Bryant must submit a list of 100 census tracts by March 21, 2017. Applications for census tract nominations are being received from the MDA at its online application portal. Once the Governor’s nominations are received, the Treasury Department will certify the zones after a 30 day consideration period (subject to a 30-day extension).
Once these zones are designated, Mississippi business, healthcare entities, and other development entities with property in (or plans for expansion into) Opportunity Zones will be positioned to benefit from both the tax incentives and the access to capital provided by this program. Mississippi businesses are encouraged to contact their local municipal leaders (mayors, county boards of supervisors, local economic development councils, etc.) and urge them to apply for Opportunity Zone designation at the MDA’s website.
This bulletin was authored by Poteat Lutken, an attorney in Wise Carter’s Jackson office. For more information about this project, contact Poteat at (601) 968-5500, or Jane Meynardie, an attorney in Wise Carter’s Gulfport office, at (228) 867-7141.