Taxes: If you liked 1031 exchanges, then you’ll love QOZs

The Midwest U.S. business community is blessed with natural resources, hardworking people, and generous designations for QOZs. That’s right… QOZs.   

QOZs, also known as Qualified Opportunity Zones, are a tax incentive program designed to encourage investment and stimulate economic growth in under-invested communities throughout the U.S. Our home state of Wisconsin has QOZs in and around all major metropolitan areas.   

QOZ legislation was built into the Tax Cuts and Jobs Act of 2017. Treasury Department guidance on the legislation was issued in Q4 of 2018. Attorneys, accountants, and investment managers have been hard at work developing QOZ strategies for their clients ever since.   

Why should someone care about QOZs? 

In addition to stimulating growth in under-invested communities, there are three important reasons why business owners and investors should care about QOZs: tax deferral, tax reduction, and tax exemption. 

Tax deferral:  Business owners / investors can realize a capital gain and defer taxes on that gain until December 31, 2026 by redeploying the gain into a QOF (Qualified Opportunity Fund) which is a fund formed to invest in QOZs.   

Tax reduction:  Business owners / investors can also reduce their original capital gain by up to 15% if they hold their new investment in the QOF for at least seven years and 10% if they hold their QOF investment for five years.   

Tax exemption:  Additionally, business owners / investors can eliminate all potential gain on their new investment in the QOF if the QOF investment is held for at least ten years. This can be accomplished by exercising a right to a one-time basis step up to fair market value for the QOF investment.   

Who should care about QOZs? 

QOZs are important for both business owners who are still investing in growing their businesses and business owners who are contemplating selling their businesses.    

First, business owners who intend to invest in new operations in designated QOZs have the potential to capture a once in a lifetime opportunity to create tax efficiency while also contributing to growth in these communities, assuming they can achieve compliance with the QOZ regulations.  

Second, business owners who sell their businesses suddenly become investors.  As investors, they can create tax efficiency by investing in QOFs managed by many different investment companies. Of course, tax strategy is only one of many important variables to consider when contemplating selling a business or making an investment.  

It is also important to consider that the timing of a potential business sale is important for QOZ compliance.  In order to be eligible for the 15% basis step up described above, a business owner / investor must make a QOF election by December 31, 2019. To be eligible for the 10% basis step up described above, a business owner must make a QOF election by December 31, 2021.   

How can someone learn more about QOZs?

QOZs present a unique opportunity for business owners and investors. Please contact us to discuss how Bay Point Food Group can be a resource for you as you consider growing your business in a Wisconsin QOZ or if you are considering selling your business and taking advantage of this unique tax opportunity.   

Sources: 

https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-new-opportunity-zone-tax-incentive

https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions