Key Takeaways from Treasury’s February 14th Opportunity Zone Hearing

By Connor Spelliscy and Zach Gillan

Overview

On February 14th, 2019, the IRS held a hearing in which new amendments to the proposed Qualified Opportunity Zones (QOZ) regulations were discussed by the IRS and key stakeholders. The IRS has thus far been very open to industry feedback and collaboration in developing these novel regulations, and an IRS representative framed the hearing by suggesting that the existing form of the regulations left open a “great deal of questions.”

At the hearing, 25 speakers voiced concerns and support for the proposed QOZ regulation. These speakers included leaders from funds, industry association leaders, and service providers. The hearing was public but not broadcast.

Key Takeaways

The following is a list of the concerns most frequently voiced by speakers regarding each of the rules/requirements included in the proposed regulation.

The 10-Year Rule requires investors to keep their capital in the same fund for 10 years in order to maximize their tax benefit.

• Speakers expressed concern that this 10-year rule would trap capital in a single entity in a single zone. The IRS was asked to allow Qualified Opportunity Funds (QOFs) more flexibility to move capital between businesses and zones. Some speakers suggested the existing rule incentivized real estate development rather than investment in operating businesses.
• Speakers asked the IRS to provide further guidance regarding the 10-year rule to give QOFs the ability to more clearly map out exit strategies from investments. Speakers said the current rules incentivized investors to pull capital out after 10 years, instead of staying invested in businesses for the long-term.

The 50 Percent Rule requires that each taxable year at least 50 percent of the gross income of a QOZ business is derived from the active conduct of a trade or business in the QOZ.

• Speakers suggested that the 50 percent rule would stifle the long-term growth of operating businesses and asked for more flexibility.

The 180-Day Rule requires that a taxpayer electing to defer a gain invests in a QOF during the 180-day period beginning on the date of the sale or exchange giving rise to the gain.

• Multiple speakers described this timeframe as too short for purposes of meaningfully deploying capital, and requested that the IRS extend period to 12 months.

The 90 Percent Rule requires that QOFs undergo semi-annual tests to confirm whether their assets consist of at least 90 percent QOZ property.

• Speakers asked the IRS to be flexible in determine which assets qualified under this rule.

The 31-Month Rule creates a working capital safe harbor for QOF investments in QOZ businesses that acquire, construct, or rehabilitate tangible business property, which includes both real property and other tangible property used in a business operating in a QOZ, for up to 31 months.

• Speakers proposed that the IRS increase the length of the safe harbor where an event arises to delay use of capital that is out of the business’ control, like natural disasters.

Next Steps

The IRS intends to hold another hearing on Opportunity Zones, likely before releasing a new set of proposed regulations.

About the Authors: Alphametic and S3

At Alphametic, we pair decades of experience building leading technology products and services with deep experience in financial services, bringing highly innovative products and tools to leading institutional investors.

For further information, reach out at contact@alphametic.io

At S-3 Public Affairs, we bring together the best in government relations and public affairs to develop and execute comprehensive and cohesive strategies for our clients. Anchored by Capitol Hill veterans, we work together to develop the most compelling messages, shape the conversation with key influencers, and move the needle on Capitol Hill and in the administration.

For more information, visit www.s3publicaffairs.com or email contact@s3publicaffairs.com.