There are three income safe harbors. There is also a potential facts and circumstances test for more unique situations.
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How can my business meet the 50 percent active gross income test?
I heard that the second set of regulations provided three safe harbors and a facts-and-circumstances test to help ensure that the 50 percent active gross income test is met. How do I comply with this?
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Compliance figures to be pretty straightforward. The safe harbors should be easy to document. But you'll need the assistance of both your accountants and counsel to ensure compliance.
To comply with the 50% gross income test, the second tranche of proposed regulations provide the following three safe harbor tests. First, at least 50% of the services performed, which is based on hours, for such trade or business by its employees and independent contractors (and employees of the independent contractor) are performed within the Opportunity Zone. Second, at least 50% of the services performed for the business by its employees, independent contractors and employees of the independent contractor are performed in the Opportunity Zone, based on amounts paid for the services performed. Third, the tangible property of the trade or business that is in an Opportunity Zone and the management or operational functions performed for the business in the Opportunity Zone are each necessary to generate 50% of the gross income of the trade or business. The facts and circumstances test states that a taxpayer not meeting any of the above three safe harbors may still meet this 50% gross income test if, based on all facts and circumstances, at least 50% of the gross income of a trade or business is derived from the active conduct of a trade or business within the Opportunity Zone.
The second set of regulations provided three safe harbors and a fourth facts and circumstances test where satisfying any one will cause the QOZB to meet the income test. They are summarized below. First, 50% of the services performed (based on hours) for the business by employees and independent contractors are performed in an OZ. Second, 50% of the services provided by employees or independent contractors (based on amounts paid for the services) are performed in an OZ. Third, the tangible property of the business that is in an OZ and the management or operational functions performed for the business in an OZ are each necessary to general 50% of the gross income of the business. Fourth, based on all the facts and circumstances, at least 50% of the gross income of the QOZB is derived from the active conduct of a trade or business in an OZ.
The Proposed Regulations provide three safe harbors for determining whether sufficient income is derived from a trade or business in an Opportunity Zone for purposes of the 50% test. Businesses only need to meet one of these safe harbor tests. First, 50% of the services performed by employees or independent contractors, as measured by hours worked, are in the zone. Second, 50% of the services performed by employees or independent contractors, as measured by compensation dollars, are in the zone. Or third, the tangible property of the business is in the zone, and the management or operational functions performed for the business in the zone are necessary to generate 50% of the gross income of the business.
Yes, the second set of regulations provide four ways your business can meet this test. These are: at least 50% of the hours related to the services provided by the business are incurred in an area; at least 50% of the fees paid for services for the business are performed in an area; the assets of the business located in the area and the management or operational functions carried out in the area are necessary to generate at least 50% of the gross income of the business, or; based on the facts and circumstances, at least 50% of the business is generated from a commercial activity in an area.
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