We have seen a lot of movement in the real estate market for opportunity zones, but far less traction with operating businesses due to a previous lack of information. In order to help those interested in opportunity zones understand how they will work, we’ve put together a Q&A of the top seven opportunity zone questions we’ve heard.
1. How will my gross income be tested to ensure I meet the 50% gross income test required for QOZBs?
The new proposed regulations provide three safe-harbor tests. You must meet at least one of the following:
- At least 50% of the services based on employee/independent contractor hours are performed in the qualified opportunity zone
- At least 50% of the services performed based on amounts paid for those services are performed in a qualified opportunity zone
- At least 50% of the gross income of the business originates from tangible property and management/operational functions located in a qualified opportunity zone
If a business cannot definitively meet any of the three safe-harbors above, the proposed regulations do allow business to substantiate their facts and circumstances to show that they are meting the 50% gross income test as well.
2. My business services companies on a global scale. Is it possible for my business to still be considered a QOZB for the revenue test?
There are many factors to consider when determining if you are a QOZB. When looking solely at the qualification to meet the revenue test, we can look first at the safe-harbors. The proposed regulations give an example of a startup that develops software applications for global sale in a campus that is in a qualified opportunity zone. Per these regulations, as long as the business’ employees and independent contractors meet the hours or wages safe harbor, it will pass the 50% gross income test.
3. I have a lawn service business that generally performs services outside a QOZ. How will my income be sourced?
This would really fall into the third safe-harbor listed above. The proposed regulations provide an example of a landscaping company whose headquarters are in a qualified opportunity zone. Its headquarters include its officers and employees who manage the daily operations of the business. The services the company provides occur both within and outside the QOZ, but all its equipment and supplies are stored on a daily basis within the QOZ.
Under these circumstances, the management activity and the storage of equipment and supplies in the qualified opportunity zone are each necessary to generate 50% of the gross income of the trade or business.
4. If my business will operate within an opportunity fund, how long do I have to get this business going?
Under currently proposed regulations, there is a working capital safe-harbor that generally allows a business a period of up to 31 months to utilize working capital held as cash and cash equivalents if they have a written plan in place. This applies to both the development of a trade or business and the acquisition, construction or substantial improvement of tangible property.
5. What if I lease most my equipment in my QOZB? Will that allow me to meet the asset tests?
Generally, yes. For leased tangible property to be considered qualified opportunity zone business property, the lease must have been entered into after December 31, 2017, and it must be considered a market-rate lease. Additionally, substantially all (70%) of the use of the leased property must be in a QOZ during substantially all (90%) of the period for which the business leases the property.
6. What if I lease the property from a related party?
There are additional requirements if the leased tangible property is between related parties. If the period of use exceeds 12 months, a prepayment to the lessor is not allowed. Additionally, the tenant must become the owner of tangible property that is qualified opportunity zone business property (QOZBP) and that has a value of at least the leased property within a 30-month period.
7. How is my inventory accounted for if it’s in transit?
Current regulations provide a safe-harbor for inventory in transit. In general, inventory in transit will not count against the asset test if the inventory is:
- From a vendor to a facility of the trade or business that is within a QOZ.
- From a facility of the trade or business that is in a QOZ to a customer’s trade or business that is not located in a QOZ.
Looking to get started?
There’s enough guidance in place for businesses and investors to begin moving forward with qualified opportunity zones investments. If you’re looking to leverage in-depth knowledge and experience, contact Wipfli. We assist our clients in determining if their investment qualifies, provide key answers and guidance, and deliver general tax, attestation, accounting and other services as well.