How can I convert an existing business into a QOZB?

Answers

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  Joseph Luna

  OZ INVESTED

  June 22, 2022

  You can’t convert an existing businesses into a QOZB because your QOF wouldn’t be acquiring QOZ stock or QOZ partnership interests if the business isn’t currently a QOZB or being organized for the purposes of becoming a QOZB. To the extent your business happens to meet the 5 QOZB tests, it would then be ineligible for a working capital safe harbor (WCSH) because it is not a start up business eligible for WCSH protection. You would have to create a new business that starts from scratch and performs a similar business in a QOZ that meets the 5 QOZB tests and has WCSH eligibility. As for certain industries that are not allowed, your QOZB can’t be a “sin business,” which includes golf courses, country clubs, liquor stores, hot tub facility, sun tan facility, massage parlor, racetracks and casinos.

• 

  Marko Belej

  Taft

  June 21, 2022

  Your existing business may already qualify as a qualified opportunity zone business (QOZB). You need to evaluate whether it meets the following criteria, or whether changes to meet these criteria are feasible: (1) Perhaps the most critical is that at least 70% of your company's tangible assets generally were purchased from an unrelated person after 2017 and began their original use in the OZ with your company. The "original use" requirement can also be satisfied if your company invests an amount in the asset over any 30-month period that exceeds the asset's basis at the start of the period, and certain other exceptions apply. If your tangible assets currently fall short of this threshold, then you might be able to cure it with additional capital expenditures. (2) At least 40% of a QOZB's intangible assets must be used in a business in an OZ. The regulations provide different rules for measuring compliance with this threshold. (3) At least 50% of a QOZB's income has to come from an active trade or business in the OZ. The regulations provide four different sets of criteria by which a business may satisfy this test. (4) A QOZB also cannot have certain amounts of working capital. If your company does, the working capital safe harbor contained in the regulations might help. (5) The following businesses are not allowed: a private or commercial golf course, country club, massage parlor, hot tub facility, sun tan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.

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