Opportunity Zones reduce taxes, invest in new development

A relatively unknown provision in this year’s tax reform bill is designed to spur economic development and job creation in some of the communities hardest hit by the recent economic downturn.

The Tax Cuts and Jobs Act of 2017 enabled the creation of Opportunity Zones in certain economically-distressed areas throughout the country, offering various tax benefits to those making investments in these communities. In April, the Internal Revenue Service designated the first Opportunity Zones in 18 states, including several in Georgia and South Carolina.

Three areas in Chatham County were nominated by Gov. Nathan Deal and designated as Opportunity Zones by the IRS. A large part of nearby Jasper County, S.C., is also a designated Opportunity Zone. The Opportunity Zones will retain their designation for the next decade.

Zone qualifications

Nationwide, the Opportunity Zones represent areas that are most in need of capital investment. By definition, these areas must have poverty rates of at least 20 percent, or have a median family income that is less than 80 percent of the median income in the surrounding area. On average, these communities had a 6 percent decline in local businesses during the prime years of the national economic recovery, according to the Local Initiatives Support Corp. (LISC), a nonprofit community development financial institution. More than half of these communities had fewer jobs and businesses in 2015 than in 2000, according to LISC. The new law is designed to rejuvenate economic activity in these areas.

The investment vehicle created by the Opportunity Zone program is a Qualified Opportunity Fund. To qualify as an Opportunity Fund, a specially-created corporation or partnership must invest at least 90 percent of its capital in a business or real property located in an Opportunity Zone. For example, Opportunity Fund investments can be used to purchase commercial buildings, equipment, or stock or partnership interests in a business.

Opportunity Fund tax benefits

There are two main tax benefits available to investors in qualified Opportunity Funds. First, investors will be able to defer federal capital gains taxes from the sale of previous investments unrelated to the Opportunity Zone (including stocks and bonds), as long as those gains are rolled over into the Opportunity Fund within 180 days. Taxes on prior gains will be deferred until the earlier of the sale of the Opportunity Fund investment, or Dec. 31, 2026.

Second, the program offers reduced taxes on gains generated during the Opportunity Fund investment. These discounts increase the longer an investment is held

• an investment sold after five to seven years receives a cancellation of 10 percent of taxes due,

• an investment sold after seven to 10 years receives a cancellation of 15 percent, and

• an investment held for at least 10 years receives a cancellation of 100 percent.

In other words, an Opportunity Fund investment held for at least 10 years is free of capital gains tax. Of course, in any of these situations, the investor would still be liable for taxes on the original investment in the fund. However, the twin benefits of deferral and graduated discounts are likely to encourage significant long-term investment in Opportunity Zones.

In addition to the federal incentive, Georgia offers state tax credits to eligible businesses that locate in the Opportunity Zones. Eligible businesses may claim a $3,500 tax credit per job created for up to five years if the business creates at least two jobs and maintains them for that timeframe. The businesses must locate within or adjacent to a census block group with a poverty rate of 15 percent or more, where an enterprise zone or urban redevelopment plan exists. Businesses of any nature may qualify for this state tax credit.

Locally, several large-scale projects are already being developed within Opportunity Zones in the Savannah area. These include the Savannah Arena and Canal District on the west side, and the Eastern Wharf (formerly known as Savannah River Landing) on the east side.

The U.S. Treasury Department and the IRS are still working on additional guidance regarding the certification process for Opportunity Funds and eligible investments made in Opportunity Zones, so further regulations may soon apply. However, the framework of the program currently in place promises to provide a significant incentive for long-term capital investment in these underutilized areas. For help finding an investment that suits your needs, contact a trusted commercial real estate attorney in your area.

John Northup, an attorney at Bouhan Falligant, focuses on commercial real estate, banking, corporate law and litigation. Contact him at 912-644-5756 or jdnorthup@bouhan.com .