The income requirement is annual. It is only the testing of the assets in the zone that happens twice per year.
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What if a QOZ Business’s income fluctuates outside acceptable levels?
A QOZB is supposed to generate at least 50% of its income from trade in a single OZ. What happens if I get a bunch of unexpected income from outside the OZ? Is it figured on a monthly basis, or annually?
Answers
It would be preferable to have a separate entity set up to receive the outside income. But if that’s not possible, it is possible that the excess income could be taxable. The timing is a question for a CPA.
It's a good question. Typically speaking, the 50% requirement will be satisfied through one of the safe harbors, so if an income event knocks out a safe harbor, you can look to the others to try and satisfy the 50% requirement. If not, you can try to argue under the facts-and-circumstances test to qualify anyway.
Complicated.
That’s more of a tax question. I would consult your CPA.
The test is a taxable year test. The regs state that 50% of the income must be generated from an active trade or business in an opportunity zone. Therefore, there is room to say that it can operate in more than one zone. Also, the second set of regs provide alternate methods to meet this test.
The April proposed regulations outlined three safe harbors that provided significantly more flexibility to QOZB's. Remember, the OZ legislation is about improving opportunities in OZs, so job-growth in designed opportunity zones matter much more than where the end-user of your products resides. 1. "At least 50 percent of the services performed (based on hours) for such business by its employees and independent contractors (and employees of independent contractors) are performed within the qualified opportunity zone" 2. "If at least 50 percent of the services performed for the business by its employees and independent contractors (and employees of independent contractors) are performed in the qualified opportunity zone, based on amounts paid for the services performed, the business meets the 50-percent gross income test found in section 1397C(b)(2)." 3. "The proposed regulations provide that a trade or business may satisfy the 50-percent gross income requirement if (1) the tangible property of the business that is in a qualified opportunity zone and (2) the management or operational functions performed for the business in the qualified opportunity zone are each necessary to generate 50 percent of the gross income of the trade or business." In addition, "Taxpayers not meeting any of the other safe harbor tests may meet the 50-percent requirement based on facts and circumstances test if, based on all the facts and circumstances, at least 50 percent of the gross income of a trade or business is derived from the active conduct of a trade or business in the qualified opportunity zone". Based on these tests/safe harbors, you need not worry too much about fluctuations in monthly/annual income, so long as your primary employees are working in one or more OZs.
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