The government shutdown slowed the progress the IRS had been making toward determining final guidance on the new policy, but important hints are finally emerging on Capitol Hill that indicate the proposed legislation is headed for clarification.
The Opportunity Zone incentive program was written into the 2017 Tax Cuts and Jobs Act to spur long-term economic investment in low-income communities. It has the potential to radically revitalize urban and rural districts across the country, build wealth in communities that need it most and save investors' money by reducing capital gains tax payments.
Vagueness about the rule’s proposed guidelines, first released in October 2018, created uncertainty and confusion. But with the first hints of spring finally arriving in the air, a warm glow has begun to illuminate the progress being made on Opportunity Zones.
Here are three recent developments from Washington that will have critical impact on the final guidelines for the program.
1. Congress sent a bipartisan letter to Treasury Secretary Mnuchin on January 24, 2019, urging that Treasury give its attention to the OZ program and raising several key issues that Congress would like to see addressed with more specificity.
The purpose of the letter was to make clear for the Treasury what Congress members’ intent was when they sponsored the legislation in the first place, according to Mary Burke Baker, Government Affairs Counselor with K&L Gates, LP. The letter itself states that the tax incentive program “…is intended to deliver transformational impact, including new jobs and higher wages, in low-income areas throughout the country…”
“If Treasury was having a problem interpreting the proposed statute,” Baker says, “the letter should offer a certain level of comfort by way of explaining the Senators’ true intent, and that can be used to support the language in the original rule.”
With Congress fleshing out its intent here, Treasury has a clearer path toward knowing what it needs to do to move forward with final regulations. This “comfort letter,” as Baker calls it, “is of real importance because it is signed by all of the original authors of the Opportunity Zone legislation that remain in Congress."
But when the government shut down in late December, the original public hearing that had been scheduled for January 10 before the IRS, where those comments and more from live witnesses would have been heard, was postponed, leaving investors and advocates in the dark.
Now that the government has reopened and the hearing has been rescheduled, public concerns will be formally reviewed and witness testimony taken into consideration. While the testimonies will be consistent with what has already been submitted to the IRS and Treasury, it will be the questions, answers and discussions during the hearing that could shed further light on officials' thinking for the next round of OZ regulations.
3. The IRS released instructions on how to implement OZ Form 8996, which is the form that a Qualified Opportunity Fund must use to certify that it is organized to invest in qualified Opportunity Zone property and whether it meets the requirement that at least 90% of the fund's assets are invested in qualifying property.
“Other than a few grammatical changes,” Baker says, “the form itself has not changed from the draft released in October.” But, she adds, “This is our first glimpse at the details of how the IRS expects taxpayers to implement the form.”
While the instructions are likely to raise as many questions as they answer, says Baker, they do appear to address several of the key issues that are pending , signaling that IRS and Treasury officials are attempting to address critical items of the legislation that have slowed its adoption.
Investors will have to wait for the final ruling on what specific requirements need to be met in order to satisfy the so called 50% Test with regard to Qualified Opportunity Zone Businesses; the 30 Months Test, which establishes the timeframe in which substantial improvements must be made; what precise elements will be used to determine what constitutes Original Use (especially when abandoned, dilapidated properties are the subject of investment); and how community-centric reporting requirements that build accountability into the rule will be imposed.
With any luck, investors and community advocates will have these questions answered by the last frost of the season.
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