By Anayat Durrani
A new report by the Government Accountability Office, Congress’s nonpartisan auditing arm, has reviewed the implementation and use of the opportunity zones tax incentive. The report examined Opportunity Zone activity across the U.S. and punctuated the need for Congress to bring more oversight and evaluation to the program.
“This report includes a welcome first-look at previously unreported data points,” says Andrew P. Doup, a corporate attorney in the real estate and emerging businesses practice group at Kegler Brown Hill + Ritter in Ohio. “The GAO report concludes with what everyone in the industry already knows: Although the incentive works, the ability of the IRS to monitor ongoing compliance and to measure impact is limited by the omission of legislative data and reporting requirements.”
The study found that the Internal Revenue Service will have difficulty ensuring compliance with opportunity zone rules since much of the data remains unavailable for analysis. High-risk taxpayers are not included in IRS research regarding taxpayer compliance. Qualified opportunity funds have drawn investments from high-wealth individuals with some funds organized as partnerships with large numbers of investors, the report said.
More than 6,000 of these funds invested about $29 billion in Opportunity Zones through 2019, per the IRS. Opportunity Zones attracted investment in multifamily housing, self-storage facilities, and renewable energy businesses, with most projects real estate focused.
“The opportunity zones legislation is designed to incentivize private investment into the communities that need it most,” says Doup. “The GAO report confirms that actual results are consistent with legislative intent: In tax year 2019 alone, more than 18,000 private taxpayers elected to invest about $29 billion into these low-income census tracts.”
The IRS developed plans to ensure OZ funds comply with requirements, but the lack of data, the report said, could make it difficult for the IRS to locate investors not following the rules.
“Tax data is currently unavailable due in part to IRS processing delays and decisions around transcription of paper-filed returns,” says Jessica Lucas-Judy, director, Strategic Issues at the U.S. Government Accountability Office. “For example, some of IRS’s preliminary summary data on investors and funds is based only on information captured from forms submitted to IRS electronically.”
She says these limitations were compounded by changes to tax filing deadlines and Opportunity Zones-specific deadlines due to the pandemic.
Designated tracts are low income, non-white
The GAO study found that on average, the selected tracts had greater poverty and a higher share of non-White populations than eligible, but not selected, tracts, and called the differences “statistically significant.”
“According to our analysis, the nearly 9,000 designated tracts are home to more than 10% of the nation’s population and have lower income, higher poverty, and greater non-white population than other eligible, but non-designated tracts,” says Lucas-Judy.
Most state government officials were aware of at least some Opportunity Zone investments but had differing views of the tax incentive's effect so far.
“To date, we have seen active real investment in less than 3% of the total Opportunity Zones that were designated by the governor of each state,” says Sean Lyons, partner at Jackson Dearborn Partners in Illinois. “I believe this is the case because most developers have gone after the “low hanging fruit,” choosing to build in the path of progress in already established growth markets.”
Lyons believes this a fleeting trend since the number of sites in these highly desirable markets is limited. He says once that supply is gone, “you will start to see capital flow towards the other 97% of the markets who have yet to see any meaningful progress yet from the program.”
He says once that occurs within the next year or so, the original intentions of the program will be better realized, which is to encourage investment in areas of economic need. He believes it will “take hold and really start to have a significant impact on these communities.”
Doup says one way to address issues raised in the report, apart from an act of Congress, is that state legislatures could fix the issue by following Ohio’s lead.
“Ohio offers a 10% state income tax credit on amounts invested into Ohio opportunity zones, and in exchange, applicants disclose dates and amounts of investment, as well as more specific information involving the underlying investment,” says Doup.
He says Ohio public records, in 2019-2020 show taxpayers saved approximately $360 million in income tax by investing into 158 opportunity zone projects throughout the Buckeye State.
“Ohio’s opportunity zone tax credit complements the federal opportunity zone laws by providing a dollar-for-dollar credit against state income tax for calendar year investments made into Ohio opportunity zones,” says Doup.
The role of Congress when it comes to the Opportunity Zone incentive
John Lettieri, President and CEO of the Economic Innovation Group (EIG) welcomed the GAO’s report and the need for more data and stronger oversight.
“Congress has important unfinished business to ensure the policy lives up to its potential, including enacting thorough reporting requirements that enable better tracking of the policy over time,” Lettieri said, in a statement.
Betty Friant, CCIM, senior vice president with Kay Properties and a Qualified Opportunity Zone professional, says she would like to see the government review one of the dates and also extend the timing of the discount built into the QOZ regulations.
“In short, give an extension on the provision that gives a 10% step up in basis on the taxes that are due and consider extending the December 31, 2026 deadline for when those taxes are due to a later date,” says Friant.
Additionally, Lucas-Judy says it is unclear how opportunity zone investments actually affect communities, something Congress has yet to act upon.
“In a report last year, we suggested Congress consider having Treasury collect data to evaluate outcomes,” says Lucas-Judy. “As of this month, no legislation has been introduced in the current Congress to address this issue.”
GAO report recommendations to improve the Opportunity Zone industry
The GAO report compared characteristics of designated and non-designated tracts; describes Qualified Opportunity Funds' experiences with and states' views on the tax incentive; analyzes available IRS data; and evaluates IRS's taxpayer compliance plans, among other objectives, GAO said.
GAO analyzed census data on tracts designated and not designated as Opportunity Zones, analyzed data from a non-generalizable sample of 18 Qualified Opportunity Funds, surveyed state officials, reviewed IRS documentation, including a compliance plan, and met with Treasury and IRS officials, GAO noted.
Based on its study, the GAO is recommending that IRS (1) address risks caused by limited data availability, and (2) research compliance risks of high-wealth investors and large partnership Qualified Opportunity Funds.
“We found that IRS can better address risks posed by limited data and complex investments. Specifically, IRS developed a compliance plan to ensure Qualified Opportunity Funds and investors are complying with the tax incentive’s requirements, but IRS faces challenges in implementing the plan because it depends on data that are not readily available for analysis,” says Lucas-Judy.
She said the IRS’s compliance plan does not include researching the potential compliance risks by high-wealth individuals and large partnerships involved in Opportunity Zone investments.
“We recommended that IRS address these risks, and the agency generally agreed to do so pending available resources,” says Lucas-Judy.
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