Editor: Sally P. Schreiber, J.D.
On Dec. 19, 2019, the IRS issued final regulations (T.D. 9889) providing guidance on tax-favored investments in qualified opportunity zones (QOZs). These regulations provide additional guidance for taxpayers eligible to elect to temporarily defer the inclusion in gross income of certain gains if corresponding amounts are invested in certain equity interests in qualified opportunity funds (QOFs), as well as guidance on the ability of those taxpayers to exclude from gross income additional gain recognized after holding those equity interests for at least 10 years. In addition, they address various requirements that must be met for an entity to qualify as a QOF, including requirements that must be met for an entity to qualify as a qualified opportunity zone business (QOZB).
Congress included in the law known as the Tax Cuts and Jobs Act, P.L. 115-97, provisions to encourage investments in low-income communities. The legislation created a process for designating certain low-income communities and qualifying contiguous census tracts as QOZs (Sec. 1400Z-1). Taxpayers, in turn, were offered three federal income tax incentives to invest in a business located within a QOZ: (1) the temporary deferral of capital gains, to the extent the gains are reinvested into a QOF; (2) the partial exclusion of previously deferred gains when certain holding period requirements in a QOF are met; and (3) the permanent exclusion of post-acquisition gains from the sale of an investment in a QOF held longer than 10 years (Sec. 1400Z-2).
T.D. 9889 finalizes regulations that were proposed in 2018 (REG-115420-18) as well as regulations proposed in 2019 (REG-120186-18). The 544-page final regulations retain the basic approach and structure of the proposed regulations, with some revisions.
According to the preamble, the final regulations provide clarifications to "make the rules easier to follow and understand." In particular, the regulations combine duplicative rules regarding QOFs and QOZBs and have added defined terms "to allow the reader to more intuitively grasp the meaning of the numerous provisions cross-referenced in the final regulations." In addition, Prop. Regs. Sec. 1.1400Z2(d)-1 has been split into two sections: Regs. Sec. 1.1400Z2(d)-1 and Regs. Sec. 1.1400Z2(d)-2.
Treasury posted FAQs (available at www.irs.gov, highlighting differences between the proposed and final regulations. The FAQs provide clarification on what types of gain can be invested under the rules; when gain can be excluded after the 10-year holding period; how QOFs can determine levels of new investment in a QOZ; and how large C corporations can invest in a QOZ.
A Form 8996, Qualified Opportunity Fund, instructions for Form 8996 (Rev. Jan. 2020), 2019 Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, and other information are available on the IRS website.