Easy to qualify. I have already done a music label. The risks are minimal except your legal fees.
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How do I qualify as an Opportunity Zone business?
I am looking to start a small music label operated by myself and four rotating, seasonal unpaid interns from a local university. I am located in an Opportunity Zone and interested in seeing if I qualify as an operating business. Revenue is generated by in-house services as well as streaming services. Looking at the rules for operating businesses, I am unsure of whether I would qualify. What risks do I hold? Please advise.
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The law and regulations provide specific guidelines for qualified Opportunity Zone businesses as to the tangible property, holding period and gross income generated in the zone. The risk if the business fails the test is that it will not be a qualified business and in turn the investment made by the QOF may be also disqualified.
A business located in an Opportunity Zone generally will qualify as long as it is operated through a corporation or partnership that elects to be a QOF and 50% of its income is derived from the zone. The proposed regulations have taxpayer-friendly rules on the 50% income test. However, the tax benefits only apply to the extent you fund the music label business with capital gains.
You probably qualify, but the question is how you'd get the benefits. You need to issue new stock to a QOF in exchange for cash that represents deferred capital gain. Otherwise, the tax benefits won't apply.
An OZ business only needs to have 70% of its assets be qualified OZ assets. To be a qualified Opportunity Zone business, the business must also pass one of the following tests. 1: 50% of revenues must generated from or inside the Opportunity Zone or 50% of revenues are generated to the Opportunity Zone. 2: 50% of employee hours or wages paid are in the Opportunity Zone. 3: 50% of management responsible for generating revenue must be inside the Opportunity Zone.
There are several tests. There may be some creative ways for a new music label business to qualify.
You should be able to qualify as an active business. Need to review your business plan and review how much will be spent on tangible property.
Basically, the easiest way to do this is to own and operate your business from within the borders of an Opportunity Zone. However, before you even get to that step, please understand that the Opportunity Zone tax incentives are only for those who have realized capital gains after Dec. 31, 2017, and reinvest an amount equal to those capital gains within 180 days from the sale of the capital asset that gave rise to the gain or 180 days from the end of the year in which the asset was sold. You would have to review your specific facts and circumstances with a qualified CPA accountant on how to do properly account for the 180-day period. But if you do have gains and do want to start an OZ business, you should know that the new regulations improved the ability for businesses to qualify since you can meet the test of a QOZ in multiple ways now: at least 50% of the services performed based on hours worked by employees and independent contractors are performed in the QOZ; at least 50% of the compensation paid for work done by employees and independent contractors are paid for services done in the QOZ; tangible property and management functions performed are each essential in generating 50% of the gross income of the QOZ business. It really can be quite overwhelming to learn all the rules and how they interact with one another, so I would always recommend engaging and consulting a qualified CPA and/or tax attorney to advise.
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