August 30, 2018

Turning Opportunity into Prosperity

When Congress passed its major tax reform legislation at the end of 2017, they included an important provision to help spur economic activity in some of our nation’s more economically depressed communities. While the economy in Georgia is booming –named the best state in the country in which to do business for the past five years in a row– our growth has been uneven. While some communities have grown and thrived, others have lagged behind. Many other states have likely experienced a similar phenomenon.

Georgia’s legislature has been attuned to this uneven recovery, and over the years provided several tools for communities and economic developers to try and spur economic activity in places where it hasn’t happened more organically. In Georgia, for instance, we have a state-level Opportunity Zone designation, which provides tax credits for jobs created in geographically defined areas; we have the One Georgia program, which provides financial incentives for companies to locate or expand in eligible communities; we have a new Rural Zone designation to incentivize the location or expansion of retail or other small businesses in our state’s smallest downtown communities; and we have military zone and less developed census tract designations, which steer tax credits for jobs created in economically depressed communities. However, Congress stepped up to provide another important tool in the toolbox by creating a Federal Opportunity Zone designation. Community leaders, economic developers, private industry, and investment fund managers would be wise to pay attention to this tool, as it has the potential to deploy large amounts of capital around the country with relatively little regulation.

Based on the law Congress passed, states were given the opportunity to designate up to 25 percent of their eligible low-income census tracts as Opportunity Zones. A list of Treasury-approved Opportunity Zones can be found here and the designations are good for 10 years. The way Congress designed the incentive to work is that taxpayers who have a capital gain can defer taxes on that gain by investing the money in a Qualified Opportunity Fund. Those Qualified Opportunity Funds can only be invested in the designated Opportunity Zone areas. The longer the investment is held in the Opportunity Zone, the greater the tax benefit will be. With U.S. investors holding an estimated $2.3 trillion in unrealized capital gains, there is an enormous opportunity around the country for investment in areas that have been economically depressed for years.

While there are already some parameters established, like how long an investor has from the time a capital gain is realized until it is invested in a Qualified Opportunity Fund, as well as what the tax advantage is to holding the investment for a minimum of five years, up to 10 years, we still anticipate additional guidance and regulation from the IRS and Department of Treasury. Meanwhile, some state and local governments are establishing their own Qualified Opportunity Funds or looking at other tools to provide additional incentives for investment in targeted areas. Other localities are looking at zoning ordinances to ensure investment in designated Opportunity Zones meets certain community goals, like providing affordable housing.

Whether you are a developer or a local government, if you want to participate in the new federal Opportunity Zone program, it’s important to stay up to speed and have a plan. Cornerstone’s professionals are experienced in state economic development, as well as federal tax law, and stand ready to assist.