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Wisconsin doubles opportunity zone benefits

Mar 25, 2020

Under 2019 Wisconsin A.B. 532 (Act 136, signed into law on March 3, 2020), effective for tax years beginning after December 31, 2019, Wisconsin has doubled the state income and franchise tax benefits for investments in qualified opportunity funds (QOFs), but only for QOFs that invest in Wisconsin qualified opportunity zone property.

Background: 2018-2019

Wisconsin has historically conformed to the Internal Revenue Code’s provisions governing opportunity zones.[1] Thus, for taxpayers who have invested in a QOF, Wisconsin has conformed to the following federal income tax benefits for tax years 2018 and 2019 — even for QOFs that did not own any property in one of the approximately 120 opportunity zones located in Wisconsin: 

  • Tax deferral: Recognition of the invested capital gain is deferred until the earlier of December 31, 2026, or whenever the investment is sold.
  • Basis step-up benefits: Investments held for five years receive a 10% basis step-up, while investments held for seven years receive a 15% basis step-up.
  • No capital gain tax on appreciation: Taxpayers who hold a QOF investment for 10 years or more pay no tax on any appreciation that occurs between the QOF investment date and the QOF sale date.  

New law: starting 2020

Under Act 136 and effective for tax years beginning after December 31, 2019, for QOFs whose average assets are at least 90% comprised of property in an opportunity zone located in Wisconsin (making the fund a Wisconsin QOF, or WQOF), taxpayers investing in them may exclude the following amounts relating to the sale of the QOF from Wisconsin taxation:

  • Investments held for five years: additional 10% (cumulative exclusion of 20%).
  • Investments held for seven years: additional 15% (cumulative exclusion of 30%).

For individuals, tax-option S-corporations and insurance companies, this additional exclusion is produced by a new subtraction modification from federal adjusted gross income or federal taxble income. For C-corporations, it is produced by a new basis adjustment.

In addition, “no later than January 31 of the year following the close of the fund’s taxable year”, funds must annually certify to each investor and to the Wisconsin Department of Revenue (the “Department”) that they qualified as a WQOF for that taxable year.   

WQOFs who are subject to federal income tax penalties under IRC Sec. 1400Z-2(f) for failing to maintain 90% of their average assets in opportunity zone property are now subject to a Wisconsin-level penalty equal to 33% of the federal penalty.

Additional guidance

On March 6, 2020, the Department issued proposed Fact Sheet 1121, “Capital Gain Exclusion – Investment in a Wisconsin Qualified Opportunity Fund”), which provides the following guidance about these law changes:

  • The new 10% and 15% subtractions do not apply to capital gains excluded or deferred under the Qualified Wisconsin Business Certification program, and they may not be claimed by an individual partner, member, or shareholder of a pass-through entity (PTE) that is making an election to pay tax at the entity level.
  • Individuals may claim the Wisconsin 30% long-term capital gain exclusion in addition to these new Wisconsin subtraction modifications.

Read more about opportunity zones:

Are you sitting an unrealized capital gains?

Final opportunity zone regulations released

Webinar: Diving into finalized opportunity zone regulations


[1] 2017 Wisconsin AB 259 (Act 231), enacted on April 3, 2018, updated Wisconsin’s conformity to the IRC as amended through Dec. 31, 2017, which included the opportunity zone regime of IRC Secs. 1400Z-1 and 1400Z-2.

Author(s)

Daniel N. Kidney, CPA, JD
Director
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