Qualified Opportunity Zones

As with any investment, reasonable steps, i.e., due diligence, must be taken. Opportunity Zones offer significant tax incentives for those investing in eligible properties, but it’s also important to note that there are several and very unique due diligence requirements you and/or your business must evaluate before moving forward.

GBQ offers services for Opportunity Zones across all property types, and we can help you get started in the right direction.

Opportunity Zone Due Diligence Services

• Review and/or assistance with preparation of Qualified Opportunity Zone Business financial projections, including analysis of:
  • Working capital
  • Qualified Opportunity Zone Business Property requirement
  • Gross income requirement
  • Related party issues
  • IRC § 163(j) interest expense limitation
  • Applicability of IRC § 199A
  • State and local tax (SALT) analysis
• Analyze and stress test the assumptions used in projects.
• Review and comment on draft term sheets and admission documents for contemplated Qualified Opportunity Zone Business investments.
• Assistance with developing documentation required under Prop Reg § 1.1400Z2(d)-1(d)(5)(iv) for reasonable amount of working capital safe harbor.

Investments in Qualified Opportunity Zones were introduced in late 2017. Ever since, these zones have generated tremendous interest from the real estate and financial advisory industries. More than 8,700 zones have been established nationwide to help economically stressed and challenged areas attract investments that would have normally been overlooked.

As these opportunity zones continue to evolve and gain traction, there are several compliance and qualifying factors that must be adhered to in order for a business to still operate within a fund. GBQ can help your business adhere to these compliances.

Opportunity Zone Compliance Services

• Perform semi-annual agreed-upon procedures for Qualified Opportunity Fund with respect to 90% asset test.
• Perform periodic agreed-upon-procedures for Qualified Opportunity Zone Business investments with respect to Qualified Opportunity Zone Business requirements.

As with any investment opportunity, there are regulations that must be followed. If you are a part of and/or invested in a Qualified Opportunity Zone, it is important that you are making informed decisions adhereto any and all regulations.

GBQ can help you through a comprehensive listing of financial statement audit, review, and compilation services to ensure you are on the right (and legal) track.

Financial Statement Audit, Review, & Compilation Services For Opportunity Zones

• Perform annual audits, reviews, and compilations of Qualified Opportunity Fund financial statements.
• Assistance with adherence to generally accepted accounting principles (GAAP).
• Perform annual audits, reviews, and compilations of Qualified Opportunity Zone Businesses, as applicable.
• Analysis of financial accounting control systems, fraud risk assessments, and cyber risk consulting.

A Qualified Opportunity Fund, organized as a corporation or partnership, is a means of investing in a Qualified Opportunity Zone property or properties that hold 90 percent of its assets in Qualified Opportunity Zone property. It’s important to note that a Qualified Opportunity Zone Property cannot invest in another fund. To become a Qualified Opportunity Fund, an eligible corporation or partnership must self-certify by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return.

GBQ can help determine if this type of fund is right for you and your business.

Opportunity Zone Fund Formation & Structuring Services

• Assistance with fund structuring.
• Assistance with complex financial modeling and projections, including analysis of IRR with Opportunity Zone benefits.
• Integration of tax credits with other tax incentives.
• Review and provide comments on various transaction documents, including private placement memorandum and Qualified Opportunity Fund organizational documents.
• Analyze yield calculations and projections in private placement memoranda.
• Consultation with issues related to:
  • Managing timing requirements imposed by statutes and regulations, including initial and ongoing capital contributions.
  • Operating distributions with consideration of potential redemption and resulting tax consequences.
  • Refinance/Debt-financed distributions.
  • Character of debt and effect on basis and potential of limitation/suspension of tax losses.
  • Method of accounting for purposes of 70% and 90% asset tests.
  • Exit strategies.
• Analysis of carried interest.
• Analyze the applicability of IRC § 163(j) interest expense limitation at Qualified Opportunity Fund.

As Qualified Opportunity Zone incentives became federal law in late 2017, impact tracking requirements were not included as part of the legislation. But recently, opportunity zone impact has received federal attention and is being evaluated to determine what data, metrics, and methodology can and should be used to measure the effectiveness of these investments.

As these regulations continue to gain traction, GBQ is watching, learning, and adhering to them every step of the way.

Let GBQ help you through a full array of services to ensure that you and your business are moving forward effectively and within regulatory guidelines.

The Qualified Opportunity Zones program provides three signature tax benefits for investors:

1. Temporary deferral of taxes on previously earned capital gains. Investors can place existing assets with accumulated capital gains into Opportunity Funds. Those existing capital gains are not taxed until the end of 2026 or when the asset is disposed of.
2. Basis step-up of previously earned capital gains invested. For capital gains placed in Opportunity Funds for at least five years, investors’ basis on the original investment increases by 10 percent. If invested for at least seven years, investors’ basis on the original investment increases by 15 percent.
3. Permanent exclusion of taxable income on new gains. For investments held for at least 10 years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds.

As you navigate through a Qualified Opportunity Zone investment, it’s important that you not only realize your tax benefits but also how your taxes should be prepared as part of these zones.