12 November 2019 Opportunity Zone bill would increase reporting requirements, eliminate certain designated zones, and prohibit certain types of Qualified Opportunity Zone Businesses and business properties On November 6, 2019, Sen. Ron Wyden proposed the Opportunity Zone Reporting and Reform Act (bill), which would substantially change the requirements for Qualified Opportunity Zones by increasing reporting, immediately eliminating designated opportunity zones that are not low-income, clarifying investment rules, disallowing additional types of properties and business, and requiring review by the Government Accountability Office (GAO). While the bill is unlikely to pass in its current form, it signals an increased scrutiny of these programs by lawmakers. The Tax Cuts and Jobs Act (TCJA) created Qualified Opportunity Zones by adding IRC Section 1400Z-1 and IRC Section 1400Z-2 to encourage investment in economically-distressed areas by giving tax incentives to taxpayers who invest and hold on to investments in Qualified Opportunity Zones through qualified opportunity funds (QOFs). (See Tax Alert 2019-1534 for EY's latest information on Qualified Opportunity Zones.) IRC Section 1400Z-2 provides benefits for investment in QOFs. A QOF is a corporation or partnership that holds at least 90% of its assets in Qualified Opportunity Zone property. Investors in QOFs must make an IRC Section 1400Z-2(a) election to defer eligible gain. The investment interest must be an equity interest and may include preferred stock or a partnership interest with allocations. In general, the investment must have been made within 180 days after the deferred gain was realized. Investors can generally defer tax on eligible gains invested in a QOF until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than five years by the end of the deferral period, 10% of the deferred gain is excluded; a 15% exclusion applies if the investment is held for more than seven years by the end of the deferral period. If the investment is held for at least 10 years, the investor is eligible for a basis increase equal to the QOF investment's fair market value on the date that the QOF investment is sold or exchanged, thus excluding 100% of the gain that would have been realized from disposing of the appreciated QOF. The bill contains the requirements already listed in the current and draft Form 8996 and draft Form 8997, as well as many new requirements, including:
In addition, QOFs would have to make publicly available on their websites a copy of each information return filed under newly created IRC Section 6039K(a) (but with a redaction of the sensitive information, such as investor TIN) during the three years beginning on the last day prescribed for filing the return. The penalty for failing to report the information required under the bill would be $10,000, with a correction to accurately report required information in the 30-day grace period bringing the penalty down to $250. The penalty would be doubled for filers who intentionally disregard the reporting requirements. The bill would disqualify any Qualified Opportunity Zone with a median family income of more than 120% of US median family income, unless the zone has a poverty rate that is at least 20% and an enrolled college student population below 10%. In addition, the bill would disqualify contiguous zones that are not low-income under IRC Section 45(D)(e) but are adjacent to low-income communities. Such disqualification would not apply to Opportunity Zones in Puerto Rico. All Opportunity Zone disqualifications would become effective upon enactment of the bill into law. In that case, property used in a census tract that was designated as a Qualified Opportunity Zone before enactment, and that becomes disqualified, can still meet the requirements to be QOZB property if:
States would be able to designate new Qualified Opportunity Zones to replace ones that were disqualified, with the designations for the newly designated ones still expiring in 2028. QOZBs may not own or operate certain businesses under IRC Section 1400Z-2(d)(3)(A)(iii), which references IRC Section 144(c)(6)(B) to designate the following "sin" businesses: golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks or other facilities used for gambling, or any stores in the principal business of selling alcohol for consumption off-premises. The bill would modify this "sin" business list by adding the businesses listed in IRC Section 144(a)(8)(B) and IRC Section 147(e), resulting in the additional prohibited businesses of tennis clubs, skating facilities, racquet sports facilities, airplanes, skyboxes or other private luxury boxes, and health club facilities. These changes would take effect as of November 6, 2019, the date the bill was introduced. Further restrictions on QOZBs (or QOFs directly investing in tangible property) would extend to self-storage property used for renting or leasing individual storage space, and stadiums or arenas used for professional sports exhibitions, games, or training for at least five days during the year. Additionally, the bill would disqualify residential rental property unless 50% or more of the residential units are both rent-restricted (within the meaning of IRC Section 42(g)(2)) and occupied by individuals whose income is 50% or less of area median income. These changes would take effect as if included in the TCJA, which was enacted on December 22, 2017. The bill would replace "substantially all" with "not less than 90%" throughout the statute. This would be a change from the proposed regulations, which consider the term "substantially all" as "not less than 90%" in the context of an asset holding period, but "not less than 70%" in the context of asset use and tangible property held by a QOZB. This change would take effect as if included in the TCJA, which was enacted on December 22, 2017. Currently, a QOF is defined under IRC Section 1400Z-2(d)(1) as a corporation or partnership that is organized for the purpose of investing in Qualified Opportunity Zone property and holds at least 90% of its assets in Qualified Opportunity Zone property. The bill would also require an entity to meet QOZB requirements to qualify as a QOF. This requirement would take effect as if included in the TCJA, which was enacted on December 22, 2017. The bill would prohibit property leased from a related person from being QOZB property. This would be effective as of December 22, 2017, the date of the TCJA's enactment. The bill would only treat property as being in its "original use" (rather than "substantially improved") if the property ever had its original use with the QOF or QOZB. Currently, the statute allows for property to fall into the "original use" category if it was originally used by the QOF or QOZB "in the [Qualified Opportunity Zone]." This provision would also be effective as of December 22, 2017, the date of the TCJA's enactment. The bill would require land to be included in a QOF's or QOZB's calculation of the adjusted basis of property that must be substantially improved. Currently, a QOF or QOZB can exclude land from the substantial improvement calculation under Revenue Ruling 2018-29. This provision would be effective as of the TCJA's enactment date. The bill would require GAO to submit to Congress after 5 and 10 years a report analyzing: the distribution of QOF investments; the impact of the Qualified Opportunity Zone designation on economic indicators, housing costs, and income distribution; benefits versus costs; and the impact on low-income communities, including those that did not receive designations. Additionally, Treasury would be required to maintain a list of all QOFs and publish that list on the internet. The bill is unlikely to pass Congress in its current form because of the Republican majority in the Senate. Given that the Opportunity Zone provisions are considered a key part of tax reform, however, the Wyden bill raises concerns for taxpayers who have made or are about to make their Qualified Opportunity Zone investment. The Wyden bill contains a very limited grandfathering clause. However, should the bill move forward, the grandfathering date will likely be updated. Taxpayers should consult with their tax advisors and preparers regarding how the bill and compliance with the reporting requirements will affect past or future transactions. We expect that the IRS will continue providing guidance on Opportunity Zones, including finalizing Form 8996, Form 8997, and final regulations, which are expected before the new year.
Document ID: 2019-2017 | |||||||||
