The Internal Revenue Service today issued final regulations providing details about investment in qualified opportunity zones (QOZ).
The final regulations modified and finalized the proposed regulations that were issued on October 28, 2018 and May 1, 2019.
The final regulations provide additional guidance for taxpayers eligible to make an election to temporarily defer the inclusion in gross income of certain eligible gain. The final regulations also address, the ability of such taxpayers’ eligibility to increase the basis in their qualifying investment equal to the fair market value of the investment on the date that it is sold, after holding the equity interest for at least 10 years.
The statute permits the deferral of all or part of a gain that would otherwise be included in income, if corresponding amounts are invested into a qualified opportunity fund (QOF). The gain is deferred until an inclusion event or Dec. 31, 2026, whichever is earlier. The final regulations provide a list of inclusion events. Further, the final regulations provide guidance to determine the amount of income that must be included at the time of the inclusion event or December 31, 2026.
The final regulations also address the various requirements that must be met to qualify as a QOF, as well as the requirements an entity must meet to qualify as a QOZ business. In order to provide clarity, the final regulations have modified the proposed regulations for QOFs and QOZ businesses. Specifically, the final regulations provide additional guidance on how an entity becomes a QOF or QOZ business, and the requirement that a QOF or QOZ business engage in a trade or business. The final regulations retain the general approach of the proposed regulations but provide additional guidance and clarity to the rules regarding QOZ business property.
The Internal Revenue Service issued guidance (PDF) providing additional details about investment in qualified opportunity zones.
The proposed regulations allow the deferral of all or part of a gain that is invested into a Qualified Opportunity Fund (QO Fund) that would otherwise be includible in income. The gain is deferred until the investment is sold or exchanged or Dec. 31, 2026, whichever is earlier. If the investment is held for at least 10 years, investors may be able to permanently exclude gain from the sale or exchange of an investment in a QO Fund.
Qualified opportunity zone business property is tangible property used in a trade or business of the QO Fund if the property was purchased after Dec. 31, 2017. The guidance permits tangible property acquired after Dec. 31, 2017, under a market rate lease to qualify as “qualified opportunity zone business property” if during substantially all of the holding period of the property, substantially all of the use of the property was in a qualified opportunity zone.
A key part of the newly released guidance clarifies the “substantially all” requirements for the holding period and use of the tangible business property:
- For use of the property, at least 70 percent of the property must be used in a qualified opportunity zone.
- For the holding period of the property, tangible property must be qualified opportunity zone business property for at least 90 percent of the QO Fund’s or qualified opportunity zone business’s holding period.
- The partnership or corporation must be a qualified opportunity zone business for at least 90 percent of the QO Fund’s holding period.
The guidance notes there are situations where deferred gains may become taxable if an investor transfers their interest in a QO Fund. For example, if the transfer is done by gift the deferred gain may become taxable. However, inheritance by a surviving spouse is not a taxable transfer, nor is a transfer, upon death, of an ownership interest in a QO Fund to an estate or a revocable trust that becomes irrevocable upon death.
The guidance (PDF) is posted on IRS.gov. These regulations relate to the Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December 2017.
Business may find they have questions about how 2017’s tax reform legislation affects their organization and their bottom line. IRS.gov is a great place to find answers. Here are several pages on the IRS website that address tax reform. Businesses can bookmark these pages and check back often, as the IRS regularly updates them with new information.
Tax reform provisions that affect businesses
This is the main page for businesses. Users can link from this page out to more resources with additional information, which is organized in sections by topic. These sections include a plain language description and links to news releases, notices and other technical guidance. Here are a few of the main tax topics on this page and the subtopics highlighted in each section:
- Income: taxation of foreign income, carried interest, and like-kind exchanges
- Deductions and depreciation: fringe benefits, moving expenses, standard mileage rates, deduction for passthrough businesses, and business interest expenses
- Credits: employer credit for paid family and medical leave, and the rehabilitation tax credit
- Taxes: blended federal income tax and withholding
- Accounting method changes
- Opportunity zones
This page also includes information for specific industries, such as farming, insurance companies, and aircraft management services.
Tax reform resources
From this page, people can link to helpful products including news releases, tax reform tax tips, revenue procedures, fact sheets, FAQs and drop-in articles. Organizations can share these materials including the drop-in articles with employees, customers and volunteers to help them better understand tax reform.
Tax Cuts and Jobs Act: A comparison for businesses
This side-by-side comparison can help businesses understand the changes the new law made to previous law. It will help businesses then make decisions and plan accordingly. It covers changes to deductions, depreciation, expensing, tax credits, and other tax items that affect businesses.