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Greenbaum, Rowe, Smith & Davis LLP

On April 17, 2019, the IRS released highly anticipated additional guidance and proposed regulations concerning investments made under the Opportunity Zone program created under the Tax Cuts and Jobs Act of 2017. The 169-page publication supplements and clarifies many aspects of the initial set of proposed regulations released by the IRS in October 2018 by providing, among other things, significant guidance for investments in qualified opportunity zone businesses (QOZBs) and additional clarity as to how to commence, operate and wind down qualified opportunity funds (QOFs). 

Under the Opportunity Zone program, Congress sought to encourage growth and investment in certain designated low income communities – Opportunity Zones – by providing Federal income tax benefits to qualified taxpayers who invest new capital (i.e., capital gains) into QOFs.  This, in turn, helps fund development/redevelopment projects and/or the development of new businesses therein.

The following represents a summary of some key takeaways of the newly proposed regulations:

Real Estate Developments

Additionally, to help foster the development of new QOZBs in Opportunity Zones, the new regulations expand the working capital safe harbor to apply to QOZB expenditures such as payroll, inventory and occupancy costs during their start-up phases. 

Leased Property

Under the Opportunity Zone program, QOZBs can own or lease tangible property for the purposes of satisfying the “substantially all” test (i.e., 70% of the QOZBs property must be “qualified opportunity zone business property”).  Under the proposed regulations:   

QOF/QOZB Operations

QOZB Gross Income Test

Other Matters

The IRS is now accepting written comments concerning the newly proposed regulations, with a public hearing scheduled for July 9, 2019.  We will continue to evaluate the newly proposed regulations and monitor their impact on new developments and new businesses within Opportunity Zones. 

If you wish to explore potential opportunity zone opportunities in New Jersey or have questions concerning the content of this Client Alert, please contact the author, Matthew J. Schiller.