There are other requirements. The program is very user-friendly.
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How can my business qualify as a QOZ business?
Does it only need to be located in an OZ or are there other requirements?
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A business that is a new company or is relocating to an Opportunity Zone can qualify as a QOZ business. There are various testing thresholds on where activity occurs and/or based on a workforce wage base that can qualify the business to the zone.
The first requirement is that the business must be an active business. For these purposes, the rent of property will also be considered an active business. However, leases known as "triple-net leases", where the tenant is responsible for all costs (insurance, maintenance and taxes) related to the property in addition to the rent, are not considered an active business. Once we determine that the business conducts an active business, it must meet the following requirements by not being considered a “sin business”. The business meets the following tests: at least 50% of its gross income is generated in a QOZ; at least 40% of intangible assets are used in a QOZ; less than 5% of its assets are non qualified financial assets; and substantially all (70%) of the tangible property owned or leased by the trade or business is Qualified Opportunity Zone Business Property (QOZBP). The activity carried out by the business cannot be one of the following referred to as sin businesses: public or private golf course; country club; massage parlor; hot tub facilities; tanning facilities; racetracks or betting facilities; selling alcoholic beverages for consumption outside the business.
For starters, substantially all (70% of more) of the tangible property owned or leased must be Qualified Opportunity Zone Property (which does mean it has to be located in an approved zone). Also, at least 50% of the gross income must be derived from sources within an Opportunity Zone. This test can be met in several ways (50% of compensation to employees and contractors must be in the zone, 50% of hours worked in a zone, tangible property and management or operational functions performed in OZ are each necessary for the generation of at least 50% of the gross income, or 50% based on all facts and circumstances in the OZ). There are quite a lot of criteria for both a QOZ business and QOZ fund. This is not a quick question. Always consult a qualified CPA and/or attorney to advise regarding your specific fact pattern.
It's hard for existing businesses to qualify, primarily because relocation into a zone doesn't normally get you there and capital gains typically aren't the basis. That being said, there are things you can do, but it requires a descent amount of hoops to jump through.
There are other requirements in the statute and regulations. It also matters whether you run your business directly through a QOF or through a QOZB entity. Both types of entities have different compliance standards.
There are several tests. First, you need to be rolling a gain into a Qualified Opportunity Fund. Second, the business must have 70% qualified OZ property in it and your existing business assets will generally not be "qualified," which means you either need to sell them into the QOF or buy additional new assets to be used in the zone so that you meet the tests. Generally, to meet the tests it is easiest to start a new business in the zone. Secondly, moving a business into the zone and trying to qualify an existing OZ business is the most difficult.
If you are referring to an existing business, it generally will not qualify if the assets were placed in service prior to the enactment of the law. The intent is to create new investment, not as a reward or tax windfall for pre-existing businesses. In addition, there are asset tests (70%) and activity tests. Furthermore, there is an "active trade or business" requirement that is defined with reference to IRC Section 162. In general, triple-net leasing and holding property as an investment will fail this test. In addition, certain trades or businesses described in section 144(c)(6)(B), commonly known as "sin" businesses cannot qualify as QOZBs. These include any 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.
An OZ business only needs to have 70% of its assets be qualified OZ assets. In addition, to be a Qualified Opportunity Zone Business, the business must pass one of the following tests. One, 50% of revenues must generated from or inside the Opportunity Zone or 50% of revenues are generated to the Opportunity Zone. Two, 50% of employee hours or wages paid are in the Opportunity Zone. Three, 50% of management responsible for generating revenue must be inside the Opportunity Zone.
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