The Tax Cuts and Jobs Act of 2017 (TCJA) established section 199A to help reduce income tax liability for individuals, trusts, and estates to parallel the rate reduction for corporations. With two years separating us from TCJA implementation, it’s certainly worth revisiting key areas where you and your related ventures may find substantial tax benefits.
With TCJA came the introduction of Qualified Opportunity Zones, 8,762 areas added to IRS tax code that have been qualified by the Secretary of the U.S. Treasury as low-income, distressed communities. These zones, along with Qualified Opportunity Funds, promote economic growth by bringing tax benefits to those investing in eligible capital within these areas, especially long-term.
How does it work?
Eligible taxpayers receive federal tax benefits by recognizing an eligible capital gain, and, within 180 days thereafter, investing it in a Qualified Opportunity Fund. These funds are corporations or partnerships specifically focused in investing in Qualified Opportunity Zone Property. In turn, Qualified Opportunity Funds reinvested at least 90% of their assets into Qualified Opportunity Zone Property.
So, how do you know if you are an “eligible taxpayer” with an “eligible capital gain”? The tax benefits from investing in Qualified Opportunity Funds benefit individuals, C corporations (including RICs and REITs), partnerships, and S corporations, as well as certain pass-through entities. An eligible capital gain must meet certain criteria for deferral. The gain must be from the sale or exchange of property with an unrelated party (not more than 20% common ownership) and the gain is treated as a short-term or long-term capital gain for federal income tax purposes. This includes gain from stocks, bonds, options, hedge funds, primary and secondary residences, businesses, machinery, commercial and residential buildings, land, livestock, art, wine, automobiles, and the net amount of Section 1231 gains.
The longer the investment is held, the greater the tax benefit. For investments lasting less than five years, investors may defer tax on gains invested in Qualified Opportunity Funds until the earlier of the date the investment is sold or exchanged, or December 31, 2026. For investments held more than 5 years, you can add a 10% exclusion of the deferred gain. Once the investment reaches 7 years, add an additional 5%. And for investments spanning more than 10 years, investors can receive a step up in basis for their Qualified Opportunity Zone Fund investment equal to the fair market value on the date it is sold or exchanged.
TCJA legislation brought about several complex tax law changes, but it’s a good practice to revisit aspects of newer tax legislation for missed opportunities. The ARB Tax Services Group is ready to help you minimize taxes and find ways to maximize your tax benefits. Contact us to see if you can benefit from Qualified Opportunity Zones, or to address your other individual and business tax needs.
by Thomas R. Flood, Senior Tax Manager, CPA, MST, CFP, PFS