23 March 2020

"Doing-The-Numbers", "The Do's-and-Don'ts" + "The Ins-and-Outs" of Opportunity Zones in The Land of OZ

Final guidelines were published end of December 2019
Takeaways from Our First 100 Opportunity Zone Strategy Calls
By Jimmy Atkinson
OpportunityDb
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Selected Episode Highlights
> Some unique examples of the types of transactions that different Opportunity Zone marketplace participants are dealing in
> How Opportunity Zones can be thought of as a Super Roth IRA
> The importance of leveraging impact, and how Opportunity Zones can be an impact force multiplier
> Answers to the most commonly asked questions about starting your own Qualified Opportunity Fund or QOZB, including:
  • What’s the minimum amount that one can put into an OZ fund and have it work?
  • Can a husband and wife form a partnership?
  • If a business moves into an Opportunity Zone, will the assets purchased prior to 12/31/17 be treated as QOZBP?
  • Best practices for forming a Qualified Opportunity Fund, including entity selection and the 50% income test
50 Opportunity Zone entities formed to-date just over the last few months. That’s funds and QOZBs over that time period, which is really incredible.
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How are people approaching different strategies?
The podcast interview is an opportunity to do that kind of that 30,000-foot overview, you’re really diving into the specifics and the nuances of some of these things so that we can specifically unpack their problems, so they’re comfortable going forward. . .  also, you know, with communicating to their accountants and their tax folks about what they need to do, . .
THE VARIETY OF TRANSACTIONS: anywhere from recycling centers, to C&D landfills, to workforce housing, to Airbnb strategies, to bitcoin ecosystems, cattle farms, bamboo farms, hemp farms, you know, actual food distribution facilities, aquaponic farms that are growing the food that they can scale into some of these areas, . .
The concept of being an impact multiplier
So, the majority of our calls have been with people who have their own capital gain and want to do their own deals, right? So, they’re taking advantage of this self-directed Super Roth IRA that we’ve talked about before because it’s tax advantage going in. It gets to grow, you know, in a tax-favorable environment.
You’re going to pay income taxes on it obviously as it’s throwing cash off of it, but then you also get to divest it tax-free on the back end and to be able to put that money, you know, into your account tax-free after a 10-year hold. And so, a lot of the folks are doing their own deals on that basis. . .
For real estate deals, it’s a little bit of a different story.
And typically, there’s a debt to equity ratio that’s kind of generally accepted. And so, what I’ve been talking to people about is that you don’t want to structure your deal with your own related-party debt that’s roughly 19%, you know, an 80% loan that’s out there from a third-party entity and then have 1% of equity that goes into the deal because I think that there could be an issue where that could be considered, you know, that it’s actually equity instead of a loan that you’re putting into the deal. And so, I think that the answer that I give people on that is that look to your industry and look at what’s kind of commonly accepted in the industry. And then you want to try to stick as close to that as possible.
> Husband-and-Wife Partnership:  as far as the IRS goes, if there are two unique taxpayer-identification numbers that are in an LLC, then that’s a partnership. And so, you know, there’s this whole kind of conversation about community property within that. . .  if they’re concerned about it and they’re worried about it, put another person in there that’s not your wife.
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QUESTION: Do assets have to be purchased after December 31st of 2017?
. . . the answer to that is yes because  it’s got to be something that’s bought from an unrelated party after December 31st, 2017.
And so, you know, the analysis on that is that if you have assets that were bought prior to that, then treat them as into that 30% category or take some of the other approaches that folks are doing out there with respect to that and deal with those accordingly.
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Opportunity Zone entities:  Qualified Opportunity Fund or a Qualified Opportunity Zone business.
The question of entity selection . . . the potential of utilizing the C corporation in order to mitigate the taxes, . . the decision to utilize a C corp is gonna depend on somebody’s ability to be able to acquire Qualified Opportunity Zone business property and to be able to do so rather easily because if they can’t do that, then they’re gonna bump up into issues associated with that 5% non-qualified financial property and what to do with the excess cash that the C corp is building.
The Opportunity Zone program allows somebody to kind of deal with the issue of double taxation and how you get money out of a C corp if you sell all of its assets.
And so, the Opportunity Zone allows you to do that and, you know, to get a step up in basis to fair market value on that and so to accordingly not have to worry about the double taxation. But that’s assuming that you have the ability to be able to acquire Qualified Opportunities Zone business property at a reasonable rate and within the time period that won’t bump you into any kind of issues associated with working capital or that won’t cause you to go in excess of that 5% non-qualified financial property.
And so, that’s been the one of the, I guess, kind of carve-outs or the best practices is that if you’ve got a question about that, go with an LLC and start it up as an LLC that’s going to be a pass-through, and pass through the losses and everything else that you can and get the benefit of the pass-through entity because you can always convert at a later date. . .
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IN THE CONTEXT OF THE 50% INCOME  TEST
" . . . if you’re going to belt and suspenders land would be, in order to prove that you’re complying with that 50% income test and that either 50% of your hours worked or 50% of your wages paid are being done in an Opportunity Zone, that you should be using a time tracking software system or some kind of time tracking system that actually shows where your employees are.
Different methods and different processes and ideas and concepts that people can use in order to be able to show that and to build, you know, that crucial audit trail relative to the 50% income test about how they’re confirming that their employees are actually working 50% inside the zone.
And so, along those lines,
  • Anyone who is thinking about selling a business, they should be looking at Opportunity Zones.
  • Anybody who is thinking about buying a business should be looking at Opportunity Zones.
  • And most definitely, anyone who’s thinking about starting a business should be looking at how they can start their business in an Opportunity Zone and do it with capital gain dollars in order to take advantage of this incentive
ALL THAT HELPS TO EXPLAIN THIS
Feds tout Opportunity Zone impact on Mesa             



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