Small business makes up a sizable share of the U.S. economy and plays a major role in local communities. But let’s face it, some areas get more love than others. You see lots of money flow through coastal cities like San Francisco and New York and not so much in the middle of the country or other economically disadvantaged locations. But the creation of “Opportunity Zones” is hoping to shift that for both small business owners and investors alike.
What is an Opportunity Zone (OZ)?
As part of the Tax Cuts and Job Act (TCJA) of 2017, Opportunity Zones were created as a way to stimulate the economy in underserved areas.
According to the IRS website, “Under a nomination process completed in June, 8, 761 communities in all 50 states, the District of Columbia and five U.S. territories were designated as qualified Opportunity Zones. Opportunity Zones retain their designation for 10 years. Investors may defer tax on almost any capital gain up to Dec 31, 2026 by making an appropriate investment in a zone, making an election after December 21, 2017, and meeting other requirements.”
The idea behind Opportunity Zones is to create tax incentives for investors to support real estate, businesses, and fuel job creation in underserved and economically disadvantaged areas. You can review all of the areas among the 50 states that are designated Opportunity Zones here.
How to qualify as an Opportunity Zone business
As a small business owner, having access to capital is crucial. Being able to access capital from investors can make a huge difference in your business and how fast you can grow and build.
That’s why starting a business in an Opportunity Zone is something to consider as you could take advantage of capital from a Qualified Opportunity Fund. In order to qualify:
- You must earn at least 50% of your gross income from the Qualified Opportunity Zone (QOZ)
- Employees work in the Opportunity Zone location
- The business is not considered a “vice” business, such as liquor stores, gambling, etc.
Many Opportunity Zone Funds have popped up to invest in real estate in Opportunity Zones as a way to economically revitalize specific areas. Business owners can use the legislation to their advantage, having access to the capital they might not otherwise qualify for, and jump on this unique offer while it lasts.
Opportunity Zone Funds, which act as an investment vehicle, have some flexibility in how they can be used.
According to the Economic Innovation Group, “The policy enables funds to be responsive to the needs of different communities, allowing for investment in operating businesses, equipment, and real property. For example, funds can make equity investments in new or expanding businesses by purchasing original-issue stock of the company if substantially all of the company’s tangible property is and remains located in an Opportunity Zone.”
You can see the different types of projects from commercial to residential, mixed-used to office on the Opportunity Zone Database website. According to the site, a whopping $62 billion dollars are available for investing in Opportunity Zones.
Tax perks for investors
The main draw for investors are the remarkable tax savings on capital gains. The IRS states, “Opportunity Zones offer tax benefits to business or individual investors who can elect to temporarily defer tax on capital gains if they timely invest those gain amounts in a Qualified Opportunity Fund (QOF). Investors can defer tax on the invested gain amounts until the date they sell or exchange the QOF investment, or Dec. 31, 2026, whichever is earlier.”
The length of the investment is what determines the overall tax benefit. In order to be eligible to become a Qualified Opportunity Fund, a partnership or corporation has to self-certify through Form 8996 each year. On top of that, the investor must have at least 90 percent of their assets invested in a Qualified Opportunity Zone property.
Businesses started in an Opportunity Zone may have better access to capital through the Small Business Administration and have unique financing options from a Qualified Opportunity Fund. Given the limited timeframe of this legislation, it’s something to consider now if you’re a small business owner.
Need help managing your tax deadlines, notices & more? We’ve got you covered.
Sign up for your free trial – no credit card required.
Shiloh Johnson is a long-time CPA and founder of ComplYant, a technology platform offering business owners and entrepreneurs a simple way to manage tax rules and requirements.