There’s a provision in the Tax Cuts and Jobs Act that is just now beginning to garner awareness among state governments and investors. But the clock is ticking on the provisions, designed to attract investment in struggling low-income neighborhoods. Many states are unaware of the provision, even though they must take action by March 22, 2018 in order to benefit.

The new code section 1400Z, slipped into H.R. 1 late as an amendment and with little fanfare, creates Qualified Opportunity Zones, which offer significant tax breaks to investors seeking to defer or abate their capital gains taxes. Likely investors include corporations, real estate companies and wealthy individuals looking to trim their capital gains tax liabilities through qualified long-term investments, including new or existing buildings, equipment, or tangible property. Investors and state officials who have become aware of the opportunity are now trying to get up to speed quickly, according to Jim Lang, a shareholder in the Tampa office of Greenberg Traurig, P.A.

“By attracting long-term investments to parts of the country that have not yet recovered from the last recession, this $1.5 billion provision could prove to be one of the most important aspects of the recent tax law,” Lang said.

The first hurdle: By March 22, states must designate qualified opportunity zones from a pool of low-income, census tracts with a critical need for economic development, which are then subject to certification by the Treasury Secretary. “Investors contemplating a variety of long-term projects are starting to lobby for the inclusion of specific tracts in these designations,” said Lang.

The Tax Cuts and Jobs Act, signed into law.
The Tax Cuts and Jobs Act, signed into law. Bloomberg News

“The TCJA requires an incredibly fast turnaround,” he added. “States have until March 22 to make designations, and there’s a 30-day cure period after that. If they haven’t made their designations by then, they’ve lost the opportunity.”

Lang believes that thus far no states have made the designation. “I would guess that none have done this yet—in fact, I would be shocked if any have,” he said. “They’re going through an evaluation process, and speaking with community leaders.”

“The zones, called ‘low income communities’ [as the term is defined in section 45D of the Code for New Markets Tax Credits], are designated by census tracts,” he said. “The governors of each state will designate up to 25 percent of such tracts in the state. The governors can also choose up to 5 percent of tracts that are not low-income communities but are contiguous to low-income communities.”

The benefits for investors are potentially huge, according to Lang. “Taxpayers can defer the short-term or long-term capital gains due upon a sale or disposition if the capital gain portion is reinvested within 180 days in a ‘qualified opportunity fund.’ If the investment is in the fund for five years, the taxpayer will receive a step-up in tax basis equal to 10 percent of the original gain. After seven years, an additional 5 percent is tacked on. Moreover, after 10 years, post-acquisition appreciation in the qualified opportunity funds is exempt from tax.”

Qualified Opportunity Zones grew out of a program sponsored by Senators Tim Scott, R-S.C., and Corey Booker, D-N.J., according to Lang. “They want capital flowing into these communities as quickly as possible,” one reason for the quick due date for designations.

The investment can be supercharged by pairing it with other credits, such as the Low-Income Housing Tax Credit and the New Markets Tax Credit.

Due to the rapidly approaching deadline for the designation of qualified opportunity zones, accountants with clients who might qualify from such investments should investigate the progress of their particular state in the process.

Roger Russell

Roger Russell

Roger Russell is senior editor for tax with Accounting Today, and a tax attorney and a legal and accounting journalist.