Starting Businesses in Opportunity Zones

What are Opportunity Zones?

The Department of Treasury and the IRS used census data to create over 8,700 “Opportunity Zones” across all 50 states, the District of Columbia and Puerto Rico.

An opportunity zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.

What are the Opportunity Zone requirements?

In order to be eligible, a Qualified Opportunity Zone (QOZ) business must earn at least 50% of its gross income from business activities within a QOZ.

The IRS established “safe harbors” that provide that this requirement will be met if either:

the management, operations and tangible property needed to generate 50% or more of the gross income of the business are located in an Opportunity Zone; or
50% or more of the services performed for the business by employees and independent contractors (based on either hours worked or compensation paid) are performed in an Opportunity Zone.
It should also be noted that golf courses, country clubs, massage parlors, hot tub or suntan facilities, racetracks, gambling facilities, and liquor stores cannot qualify as qualified businesses.

Tax perks for Opportunity Zone Businesses

In April 2019, the IRS clarified tax benefits for investors who invest in businesses that are based in opportunity zones. This was huge news.

Investors in businesses based in designated opportunity zones are eligible for the same exact capital gain tax benefits as real estate investments in opportunity zones.

The Opportunity Zone program provides tax benefits to investors who invest capital gains into a qualified opportunity fund (“Qualified Fund”) within 180 days of the sale or exchange giving rise to such gains.

It stands to reason that startup businesses who locate their headquarters or services in Opportunity Zones have a ripe market to find investors.