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Hot Tax Topics
for Corporate
CounselBy Aman Badyal
Qualified Opportunity Zones
An Overview
What are Opportunity Zones?
• The incentive allows taxpayers to:
– Defer taxes on the capital gain
that has already been realized.
– Reduce taxes ultimately paid on
those deferred capital gains.
– Eliminate future capital gains
taxes on the new investment if
it is held for 10 years.
Tax Benefits
What are Opportunity Zones?
• State Governors nominated census tracts for designation as Opportunity Zones.
• The IRS reviewed nominations and approved the designations.
• To be eligible the tract must be in a low-income community or contiguous to a
low income community.
– Map for the designated opportunity zones:
– https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx
Designation
How Do Opportunity Zones Work?
• To take advantage of the incentive, within
180 days* of realizing a capital gain, the
taxpayer must invest in a
Qualified Opportunity Fund (QOF).
• A QOF must invest 90% or more of its
assets in Qualified Opportunity Zone
Property.
• Can be combined with other tax
incentives
Overview
How Do Opportunity Zones Work?
• Qualified Opportunity Zone Business Property.
– Tangible property acquired post-2017
– Original Use or Substantially improved
• Stock or “Partnership” Interests in Certain Business Entities.
Opportunity Zone Property
How Do Opportunity Zones Work?
• Service Provider Hours Safe Harbor
• Service Provider Compensation Safe Harbor
• Management or Operational Functions Safe Harbor
Opportunity Zone Business Entities50% Gross Income Safe Harbors
How Do Opportunity Zones Work?
The property was acquired by a lease entered into after Dec. 31, 2017.
• The terms of the lease are market rate as of the time that the lease was entered into.
• If the lessee and the lessor are related parties, additional requirements must be satisfied.
• The value is determined at the time the entity enters into the lease.
Opportunity Zone PropertyLeased Property Requirements
How Do Opportunity Zones Work?
Structuring
90% 10%
QOZ StockQOZ
Business Property
QOZ Property
Other Property
QOF
QOZ Partnership
Interest
Timeline of Tax Benefits10 years
7 years
6-12 Months180 Days
Taxpayer realizes capital gain
Taxpayer invests the capital gain
into a QOF
5 Year Holding Period: The
deferred gain is
reduced by 10%
7 Year Holding Period: The
deferred gain is reduced by an additional 5%
Taxpayer can sell QOF interest tax-free through 2047
*December 31, 2026, remaining deferred capital gain is recognized.
5 years
QOF invests in
QOZ Property
Additional QOZ Topics
• Who may find this incentive interesting?• Should I invest in a third party fund or create my own?• State conformity / non-conformity.• Liquidity planning issues.• What if I want to sell early?• What is substantial improvement?• Reasonable working capital.• Gains earned through passthrough entities
or from section 1231 Assets.
Spin-offs – 5 Year Active T/B
• IRC section 355 provides many requirements for a tax-free spin-off, including that both the distributing company and the distributed company have conducted an active trade or business for 5+ years.
• Treasury Regulations Section 1.355-3(b)(2)(ii) explains that a trade or business exists when “activities are being carried on by the corporation for the purpose of earning income or profit, and the activities included in such group include every operation that forms a part of, or a step in, the process of earning income or profit. Such group of activities ordinarily must include the collection of income and the payment of expenses.”
• Revenue Rulings 57-492 and 57-464 retracted.
Foreign Derived Intangible Income (FDII)
• Must be a domestic C Corporation.
• Deduction equal to 37.5% of Foreign Derived “Deemed Intangible Income”.
FDII Documentation Requirements
• General Property Sales v Intangible Property Sales.
• B2B Services v B2C Services.
Section 199A – Qualified Business Income
• Deduction equal to 20% of domestic income from a qualifying trade or business.
• Limitations and exclusions apply if the shareholder/owner’s income exceeds certain threshold amounts.
• Limitations:
– 50% of W-2 wages paid; or
– 25% of W-2 wages paid plus 2.5% of Unadjusted Basis of depreciable property used by or in the trade or business.
• Exclusion for Specified Services Trade or Business.
Net Operating Losses
• An NOL is the excess of business deductions over business income in a given year.
• Prior to TCJA, NOLs were carried back two years and/or forward 20 years.
• TCJA - Post 2017, NOLs can be carried forward indefinitely subject to an annual cap.
Trends Towards Market-Based Nexus and Sourcing
• Multi-State Sales Tax
– Old Law – Physical Presence
• National Bella Hess (1967)
• Quill (1992)
– New Law – Economic Nexus
• Wayfair (2018)
• Cloud Computing Regulations
• OECD Digital Tax Plan
