Tax Update - Qualified Opportunity Zone Final Regulations and Highlights of Tax Provisions in Spending Bill
By: Christopher Nuss
Final Regulations for Qualified Opportunity Zones
At long last, after two sets of proposed regulations, the IRS finalized its regulations with respect to investing in a “qualified opportunity zone” (“QOZ”). See previous articles on the tax benefits of such an investment and how to qualify for them here: Invest in Opportunity Zones and Updated Guidance on Opportunity Zone Investing.
Although the final regulations largely mirrored the proposed regulations, there were a few new taxpayer-friendly rules or clarifications that are worth mentioning. Those include:
- Section 1231. Gains from selling business property (section 1231 gains) that are eligible for deferral may include the “gross” gain, rather than first offsetting the gain with any losses from selling similar property.
- Gain from pass-through entities. Owners of pass-through entities (like partnerships and S corporations) may elect to start the 180-day investment period on the due date of the entity’s federal income tax return (rather than as of the end of the tax period), thus allowing more time to defer taxation of the gain.
- Substantial improvement test. For purposes of satisfying this test, certain properties and assets can be aggregated, rather than applying the test by each property or asset. This should help qualification for larger rehabilitation projects.
- Working capital safe harbor. There is now additional time for “start-up” businesses to meet certain asset and income qualification tests, up to 62 months (instead of the original 31 months).
In conjunction with releasing final regulations, the IRS highlighted more of the changes in an FAQ format at Final Regulations on Opportunity Zones. Further to qualified opportunity zones, the IRS recently informed a U.S. representative that the census tracts that were designated as QOZs by each state back in 2018 are final – no census tract can be added as a QOZ nor can census tracts be replaced under existing law (although Congress should be able to “reopen” the designation process for QOZs) — see: IRS letter.
New Tax Provisions in Federal Year End Spending Bill
In late December, the bill to fund the U.S. government included several tax provisions. Some of the highlights are as follows.
- Extending certain tax credits through 2020 (or in some cases 2022), such as the new markets tax credits, the work opportunity tax credit, the biodiesel and renewable credit (to name a few).
- Relating to individual retirement matters (the SECURE Act), the maximum age for contributing to traditional IRAs has been repealed (previously 70.5 years), required minimum distributions now start at 72 years old (rather than 70.5), and the limit on how much an employee can “automatically” contribute to a 401(k) plan has been increased from 10% to 15%.
- In the health care arena, previously suspended tax provisions were permanently repealed beginning in 2020 – namely, the 40% excise tax on high-cost employer sponsored health plans (known as the Cadillac tax) and medical device excise tax.
- To offset the cost of the above provisions (and other tax savings), revenue is to be generated by: (1) requiring non-spousal beneficiaries of IRAs to take distributions now over 10 years, rather than previously “stretching” distributions out over the beneficiary’s lifetime; and (2) increasing the amounts of certain penalties.
For any questions or additional guidance relating to these new tax rules, please contact your BrownWinick attorney or one of our tax attorneys listed below.
Christopher Nuss (P) 515.242.2432 (E) email@example.com
This article was written for general informational purposes and summarizes the tax laws. As such, it should not be relied upon for compliance with the Internal Revenue Code.