How is the OZ program compatible with Qualified Small Business Stock (QSBS) rules?

Answers

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  Matthew Rappaport

  Falcon Rappaport & Berkman

  December 06, 2019

  You can qualify for each program separately and combine the benefits. There is some question as to the interaction between QOZs and QSBS if you pull off both successfully. There's the idea of a QOF being a QSB, and a QOZB being a QSB. Depending on your interpretation, there are possibly differing consequences in each scenario. What's certainly cool is that your QOF can do a Section 1045 exchange if it has QSBS. This could potentially allow you to keep the 10-year timer going while switching investments.

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  Matt Campbell

  Hall Estill

  December 05, 2019

  Good question. If the QOF fails, you'd either have penalties or a capital gain triggering event on any capital gain brought into the deal. However, if the QOZB is a C corporation, that could preserve an ability to have a tax free exit on the QOF investment still.

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  Maria De Los Angeles Rivera

  Kevane Grant Thornton

  December 06, 2019

  Both are not mutually exclusive. Therefore, if the requirements of Section 1202 are met, the benefits will apply.

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  Peter McNeil

  Comprehensive Financial Solutions and Tax

  December 07, 2019

  It is possible that a failed Opportunity Zone business that was structured to conform to the rules of 1202 would get the 1202 benefits even if you failed to qualify as an Opportunity Zone business. However, the tax deferral that investors received for putting money into an opportunity zone fund would be clawed back with interest if the deferral. If the business does qualify under the Opportunity Zone rules, you will still have to pay corporate tax on income as well as taxes on the dividends that could be avoided by using an LLC. LLCs and S Corporations do not qualify for the gain exclusion of QSBS. One benefit to QSBS is that noncapital gain investments will get tax free capital gains after five years. Opportunity Zones get no tax benefit for noncapital gain investments. You need a tax professional well versed in both sets of law to properly evaluate your situation.

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