I just learned that my company is located in an OZ. What can I do to take advantage of this?

Answers

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  Marko Belej

  Taft

  November 06, 2020

  As an initial matter, there are a few ways by which a company in an OZ "can take advantage" of being in an OZ, which will determine what it needs to do. First, it may be able to provide tax advantages to its owners, if they have gains that they could invest in the company. Second, even if the existing owners don't have such gains or don't plan on making such investments, then there may be third parties who do and would be willing to invest in your company on terms favorable to you because of the tax benefit they will receive. Third, the value of any real property owned by the company in the OZ will become more valuable as a result of being in an OZ. If you want to take advantage of being in an OZ under the first two alternatives, your company generally will need to qualify as a qualified Opportunity Zone business (QOZB). While there are several requirements that need to be satisfied, 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. For certain companies that have very few tangible assets and do not currently meet this requirement, this requirement can be met with a minimal investment in additional tangible assets. If your company qualifies as a QOZB, then the owners or third party investors could form a new LLC, invest gains into the new LLC within the required 180-day period and have the new LLC invest the funds into your company in exchange for additional equity. Note that the OZ deferral and exclusion benefits would be enjoyed by these investors and the benefit to your company would be only indirect, in the form of "cheaper" equity. If your company cannot qualify as a QOZB, and it wishes to capture the increased value of its real property (the third alternative described above), then it simply has to sell its property (admittedly, this may fit with your company's plans in only limited circumstances).

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  Matthew Rappaport

  Falcon Rappaport & Berkman

  November 05, 2020

  If you're looking to raise money, you can go through the compliance and tout your status as an Opportunity Zone business. That'll help you raise money and differentiate yourself from any other businesses investors might be considering. If you don’t want to take on any additional capital, you'd need to determine whether the OZ program is right for your goals, and then see what the costs of compliance would be before committing.

• 

  Joseph Luna

  OZ INVESTED

  November 05, 2020

  There are a lot of variables at play for an existing company located in an OZ to be able to benefit from its location. The pressing issue is whether your company will be able to become a Qualified Opportunity Zone Business (QOZB). The benefit of becoming a QOZB would be that you could sell equity in your company more easily (and at a higher price) to investors looking to invest in a QOZB. If you are not able to meet the QOZB requirements outlined below, the other indirect benefit offered by being located in an OZ is the ability to receive a higher sales price on your assets located in the OZ, should you elect to sell in the next few years. Without any additional information about your company, I doubt you will be able to accidentally become a QOZB, unless your company is relatively new and meets some complex requirements. To become a QOZB, your company must be a legal entity (taxable as a corporation or a partnership) that can satisfy the following requirements at the end of each taxable year. Substantially all (at least 70%) of the tangible property owned or leased by the QOZB must be Qualified Opportunity Zone Business Property (QOZBP). To be considered QOZBP, the tangible property owned or leased must satisfy the following requirements: The property must be acquired by purchase or lease from an unrelated party after December 31, 2017; either the original use of the property in the OZ commences (for depreciation purposes) at purchase or the QOZB substantially improves the property. The test is met if during any 30-month period beginning after the date of property acquisition, additions to the basis of the property exceed an amount equal to the adjusted basis of the property at the beginning of the 30-month period. During substantially all (90%) of the QOZBs holding period for the property, substantially all (70%) use of the property must occur in an OZ. At least 50% of total gross income must be derived from the active conduct of a business in an OZ. This requirement can be satisfied in one of three ways: if 50% of the total hours of services performed by employees or independent contractors for the business occur in an OZ during the taxable year; if 50% of amounts paid by the business to employees, service partners (if a partnership), or independent contractors are for services performed in an OZ during the taxable year; or if the tangible property located in an OZ, as well as the management or operational functions performed in an OZ, are each necessary for the generation of at least 50% of the gross income of the trade or business. At least 40% of the intangible property must be used in the active conduct of a business in an OZ. No more than 5% of the average of the aggregate unadjusted basis of property held by the QOZB may be attributable to nonqualified financial property (NQFP). NQFP includes cash, debt in excess of 18 months, stock, partnership interests, options, futures/forward contracts, warrants, and annuities. In addition, no more than 5% of QOZB gross income can come from operating a private/commercial golf course; a country club; a massage parlor; a hot tub facility; a suntan facility; a racetrack or facility used for gambling; or a store where the principal business is the sale of alcohol for consumption off premises. As mentioned earlier, I highly doubt your company currently qualifies as a QOZB. Even if it does, you must be aware that should you land investors because of your QOZB status, you’ll have to ensure compliance with the five QOZB requirements at the end of each taxable year, or your investors will likely face severe penalties. Otherwise, unfortunately, the only other way you can take advantage of your location in an OZ, would be your ability to sell your company’s assets (land, building, fixtures) located in the OZ at higher prices to buyers.

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