Opportunity Zones: a Compelling Tax-Advantaged Investment for Business Sellers
Cashing in on the sale of your business is the final reward for many years of dedication and hard work. Then your CPA tells you how much you will owe in taxes. It’s a shock, but there’s a relatively new reinvestment opportunity that may help trim your tax bill …
In April 2018, The U.S. Department of the Treasury and the Internal Revenue Service (IRS) designated Opportunity Zones in 18 States. The Tax Cuts and Jobs Act created Opportunity Zones to spur investment in distressed communities throughout the country. New investments in Opportunity Zones can receive preferential tax treatment.
Under the Tax Cuts and Jobs Act, States, D.C., and U.S. possessions nominate low-income communities to be designated as Qualified Opportunity Zones, which are eligible for the tax benefit. Attracting needed private investment into these low-income communities will lead to their economic revitalization, and ensure economic growth is experienced throughout the nation,” said Secretary Steven T. Mnuchin. “The Administration will continue working with States and the private sector to encourage investment and development in Opportunity Zones and other economically disadvantaged areas and boost economic growth and job creation.”
Qualified Opportunity Zones retain this designation for 10 years. Investors can defer tax on any prior gains until no later than December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund, an investment vehicle organized to make investments in Qualified Opportunity Zones. In addition, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold.
How Opportunity Zone Funds work
An investor who has triggered a capital gain by selling a business or real estate, can receive special tax benefits if they roll that gain into an Opportunity Fund within 180-days. Advantages are:
- The payment of capital gains is deferred until December 31, 2026
- It reduces the tax owed by up to 15% after 7-years
- There is zero tax on gains earned from the Opportunity Zone Fund
If you’re planning to realize a sizeable capital gain or recently sold an asset where there is a capital gain (within the 180-day filing window), Opportunity Funds may help to keep more in your bank account and less in the federal treasury. It’s worth a look. Consult with your CPA or financial advisor.
Bob Altieri is a senior M&A advisor and business valuation expert with Exit Strategies Group. He can be reached at firstname.lastname@example.org.