By Joey Strength
My number one recommendation to business owners for the remainder of 2019 is to consider how your business might benefit from the Investing in Opportunity Act legislation contained within the 2017 Tax Cut and Jobs Act. The Investing in Opportunity Act authorized governors to designate up to 25 percent of low-income census tracts within their states as federal opportunity zones. Investors who make qualified investments of capital gains in these zones through a qualified opportunity fund may receive three forms of tax benefits: deferral of tax on the invested gains, partial forgiveness of the tax on the invested gains (up to 15 percent if the investment is made in 2019 and held for seven years), and full forgiveness of the capital gains on the sale of the investment in the qualified opportunity fund if it is held for ten years or more.
This third benefit is the most significant one for many business owners. It allows a business owner to create a new business, relocate an existing business, or expand an existing business in an opportunity zone and then structure the sale of that business, if held for more than ten years, without owing any tax (capital gains and perhaps depreciation recapture) on the sale. Officials from the U.S. Treasury have acknowledged the possibilities of this incentive and suggested that they hope it, along with the other incentives, will be significant enough to encourage the next Amazon to be started in an opportunity zone.
Significant portions of Brunswick, including most of downtown, and parts of mainland Glynn County have been designated federal opportunity zones. While the next Amazon may not locate in Brunswick, the program is likely to attract interest from new or existing business owners: (1) who intend to start or have a business that is likely to appreciate in value and, if new, can be located in an opportunity zone or, if existing, can be relocated into or expanded within an opportunity zone; (2) who have capital gain to invest in the new or existing business; and (3) who can utilize the invested capital gains to acquire or lease property in an opportunity zone so that, following the investment, 70 percent or more of the tangible property of the business is newly acquired or leased. For newly acquired property, the property can be property (such as equipment) not previously located in the opportunity zone and initially placed in service by the owner. For property already located within an opportunity zone (such as a building), it can be property to which substantial improvements will be made (over a period not to exceed thirty months following the purchase).
There are only a limited number of excluded businesses: golf courses, country clubs, massage parlors, hot tub or suntan facilities, racetrack or gambling facilities, and liquor stores. Any other types of businesses may qualify, though there are additional tests that must be met, which are generally intended to have real operating businesses with employees and equipment located in the opportunity zone. One example of a qualifying business in the proposed regulations is a landscaping company whose officers and employees manage the operations of its business from headquarters leased in the opportunity zone. The business performs services for customers both inside and outside the opportunity zone, but its equipment and supplies are stored at the business headquarters.
Will an incentive like this one encourage a landscaping company or, for that matter, any other business owner to relocate its operations from St. Simons Island, Atlanta, or some other location to the revitalizing Brunswick downtown? I think so. The program is already spurring real estate activity. The next and possibly more significant impact the legislation will have on the communities within opportunity zones will be the strategic decisions business owners make to locate in these opportunity zones—like downtown Brunswick—in the coming years.
JOEY STRENGTH is a partner at HunterMaclean, practicing primarily in real estate and development law, estates and trusts, and business transactions. He is a trusted advisor for his clients, which range from individuals to publicly traded companies, and provides them quality legal representation and advice across a broad range of areas. He is a proponent of the Opportunity Zone legislation that was included in the 2017 Tax Cut and Jobs Act and has represented HunterMaclean in a national working group of attorneys, accountants, developers, and others who have collaborated to provide input in the regulatory process. He is currently working with several clients who are considering how they might benefit from the program and enjoys sharing about the program with others.
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