If the timing is correct, a business located consistently in an Opportunity Zone can qualify as a biz for QOF investment, even if it is located in leased space.
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If a freelancer or solopreneur starts an online business, forms an LLC and locates it in a co-working space in an Opportunity Zone, how can this qualify as an Opportunity Zone business?
The freelancer develops a SaaS platform that, after a year of development, generates a profit. They pay off the credit cards and operate as an independent firm, which is later sold to another company after 10 years. Can this type of QOZB scenario qualify?
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It could potentially qualify, depending on the nature of its property, employees, and activities. There's nothing about the scenario that would eliminate the possibility of being eligible for QOZ benefits.
A Saas business could qualify in rented space, but it would need QOF investment for 10 years for the tax benefits to kick in for the investors. The idea, then, would be for the business to grow in value so that when it was sold, the sale would generate a profit.
You can qualify as a qualified Opportunity Zone business as a freelancer but must follow the rules that any Opportunity Zone business would need to follow. These rules are: An OZ business only needs to have 70% of its tangible assets be qualified OZ assets that are located in the opportunity zone. To be a qualified Opportunity Zone business, the business must also pass one of the following tests: 50% of revenues must generated from or inside the Opportunity Zone or 50% of revenues are generated to the Opportunity Zone; 50% of employee hours or wages paid are in the Opportunity Zone; 50% of management responsible for generating revenue must be inside the Opportunity Zone.
With proper documentation and meeting the 50% of income/operations in the OZ, the taxpayer could meet the qualification tests. But will need to watch situations where you might outsource services to non-QOZ independent contractors.
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