January 14 2020

Final regulations issued on investing in qualified opportunity funds

Source: IBFD Tax Research Platform News

The US Treasury Department and the US Internal Revenue Service (IRS) released final regulations (TD 9889) to provide guidance on the extent to which taxpayers may elect the Federal income tax benefits provided by section 1400Z–2 of the US Internal Revenue Code (IRC) with respect to certain equity interests in a qualified opportunity fund (QOF).

The final regulations are published in the Federal Register on 13 January 2020.

The IRS also issued a related News Release (IR-2019-212) dated 19 December 2019.

The Tax Cuts and Jobs Act (TCJA) added IRC sections 1400Z-1 and 1400Z-2. IRC section 1400Z-1 addresses the designation of population census tracts located in the 50 US states, US territories, and the District of Columbia (Washington DC) as qualified opportunity zones (QOZs).

IRC section 1400Z-2 provides two main Federal income tax benefits to eligible taxpayers that make longer-term investments of new capital in one or more designated QOZs through QOFs and QOZ businesses, including:

  • electing to defer until an inclusion event or 31 December 2026, whichever is earlier, the inclusion in gross income of certain gains that would otherwise be recognized in a taxable year if the taxpayer invests a corresponding amount of such gain in a qualifying investment in a QOF within a 180-day statutory period, combined with:
    • potentially excluding 10% of such deferred gain from gross income if the eligible taxpayer holds the qualifying investment in the QOF for at least five years; and
    • potentially excluding addition 5% of such deferred gain if the eligible taxpayer holds that qualifying investment for at least seven years; and
  • electing to exclude from gross income any appreciation on the eligible taxpayer's qualifying investment in the QOF if the eligible taxpayer holds the qualifying investment for at least 10 years.

The final regulations provide guidance for taxpayers eligible to make an election to temporarily defer the inclusion in gross income of certain eligible gain. The final regulations also address such taxpayers' eligibility to increase the basis in their qualifying investment equal to the fair market value of the investment on the date that it is sold, after holding the equity interest for at least 10 years.

The final regulations provide a list of inclusion events. Further, the final regulations provide guidance to determine the amount of income that must be included at the time of the inclusion event or 31 December 2026.

In addition, the final regulations address the various requirements that must be met to qualify as a QOF, as well as the requirements an entity must meet to qualify as a QOZ business, including the requirement that a QOF or QOZ business engage in a trade or business.

The final regulations are effective on 13 March 2020.

The final regulations contain various applicability dates.

Related IRS forms, IRS instructions and other information are scheduled to be released in January 2020.