Advantageous Tax Strategy: New Law Encourages Investments in Low-Income Communities

PSMJ Resources, Inc.
Posted on: 02/08/18
Written by: PSMJ Resources, Inc.

sunglasses on rock-1-631203-edited.jpgAs architecture and engineering firms continue to assess of the impact of the new tax law on their business, among the developments to keep an eye on are future opportunities resulting from advantageous tax strategy. 

For instance, the recent federal tax legislation, Public Law 115-97 (the “Act”), signed into law on December 22, 2017, has created new tax incentives for investments in low-income communities. 

In its recent Impact Investing Alert, law firm McCarter & English, LLP explains that investors selling any property may elect to defer capital gain taxes otherwise payable arising from the sale of such property so long as they invest the amount of any gain in a "qualified opportunity fund" within 180 days after the sale.

Furthermore, if such an investor holds its investment in a qualified opportunity fund over an extended period, the Act is intended to allow the investor to (i) reduce and possibly eliminate the previously deferred tax and (ii) potentially eliminate tax on post-acquisition appreciation in value of the qualified opportunity fund investment. 

A lot of things need to happen before these tax incentives become available.  According to the M&E Impact Investing Alert (exerpted here), the Act provides for a process whereby state governors may nominate up to 25 percent of the low-income community census tracts in their respective states as "qualified opportunity zones" (except that if a state has fewer than 100 low-income communities, then up to 25 of such tracts may be nominated as qualified opportunity zones).

Those nominations are required to be made in writing to the Secretary of the Treasury within 90 days following the date of enactment of the Act (i.e., no later than March 22, 2018) and take into account factors described in the legislative history. The Act does provide that a state governor may request a 30-day extension for those nominations. The Act further provides that the Secretary of the Treasury shall prescribe regulations necessary or appropriate to carry out the purposes of the new rules, including rules for the certification of qualified opportunity funds and rules to prevent abuse.

The Act defines a qualified opportunity fund as any "investment vehicle" that is a corporation or a partnership (including, presumably, a limited liability company) organized for the purpose of investing in "qualified opportunity zone property" and that holds at least 90% of its assets in qualified opportunity zone property at the required times. 

In the short run, communities that want to take advantage of the benefit of these tax incentives will need to be sure that the governor of their state nominates them as a "qualified opportunity zone" by the required deadline. Organizations that want to facilitate investments in qualified opportunity funds may want to participate in the process of formulating the Treasury Department regulations, which will define the requirements for the qualified opportunity funds. Once the regulations have been issued, organizations that want to sponsor such funds will need to work with experienced legal counsel in establishing such funds and investing the capital they raise so as to maximize the benefits to their investors.

About the Author: McCarter & English, LLP is a firm of approximately 400 lawyers with offices in Boston, Hartford, Stamford, New York, Newark, East Brunswick, Philadelphia, Wilmington and Washington, DC. In continuous business for more than 170 years, we are among the oldest and largest law firms in America. Click here to read the full article.

PSMJ is always looking to publish diverse views on emerging issues and trends in the A/E/C industry. We invite you to submit a 500-word post on any industry-related topic. We look forward to hearing from you.

Guest Blogging

In the PSMJ Blog, we have covered tax law and the A/E industry from a number of angles. Here is a list of recent tax law-related blog posts:

Republicans Finalize Tax Cuts and Jobs Act

Uncertainty Reigns as Congress Settles Tax Reform

Congressional Intent of The R&D Tax Credit?

The Little Known A/E Tax Strategy That’s Worth A Bundle

To Be or Not To Be: Federal Research Tax Credits?

 

 

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