If you are an investor or an entrepreneur and exploring options for a new investment or business expansion, then you have something to get really excited about. The reforms to the Tax Cuts and Jobs Act have opened up numerous Tax Opportunity Zones across the United States, which allows entrepreneurs to invest in these regions and seek significant tax breaks. The introduction of the Opportunity Zone Fund to this effect has been done to promote investment and growth in economically distressed areas of the country.
Business expansion and investment planning is a very crucial decision for any investor or entrepreneur because of the risks involved and the large amount of capital it engages. Earning a fair return on such an investment is one of the critical factors considered before taking an investment decision.
The Tax Opportunity Zone Fund allows you to marry the enticing world of profits with sizeable tax benefits.
By investing in such funds, you may become eligible for various tax benefits, preferential tax treatment, and save tons on your taxes to maximize your gains. Some benefits include deferring payment of taxes on the sale of stock, business assets or sale of any other property and investing the proceeds in an Opportunity Zone Fund.
Read on to know all about this exciting investment opportunity:
All about Opportunity Zones
Opportunity Zones are the economically distressed areas of the society which are being promoted for investment by the U.S. government to bring about growth in local communities and harness development in such areas. The government has introduced a lucrative tax incentive program for businesses willing to invest in these zones by making reforms in the Tax Cuts and Jobs Act in December 2017. The Opportunity Zones serve as economic development tools by creating employment in the economically distressed areas of the country.
What is a Qualified Opportunity Fund?
A qualified opportunity fund is an investment fund formed to invest in eligible properties located in qualified opportunity zones by corporations or partnerships.
How to become a Certified Opportunity Fund?
Corporations or partnerships can become qualified opportunity fund through self-certifying by filling the Form 8996 — Qualified Opportunity Fund along with their federal income tax returns. A Limited Liability Company can also organize as a qualified opportunity fund if they are treated as a corporation or a partnership while filing their income tax returns.
The 50% Gross Income Test
To become a qualified opportunity zone business, your business must earn at least 50% of its gross income through its operations in a Qualified Opportunity Zone every tax year. Your business needs to fulfill the criteria of one of the following three tests: –
- Hours-of-services-received test.
- Amounts-paid-for-services test.
- Necessary-tangible-property-and-business-functions test.
What if you don’t qualify all the three safe harbors?
You are only required to qualify at least one of the three safe harbors tests. So, for example, if your business receives 50% or more of all the hours of service in one or more qualified opportunity zone, then it would meet the Hour Test and hence qualify the gross income test to become an eligible opportunity zone business.
Investment criteria to be a qualified Opportunity Zone Business
You would be required to invest at least 90% of your assets directly or indirectly in a business or businesses operated in one or more qualified opportunity zone.
Benefits of investing in an Opportunity Zone
Investing in a qualified opportunity zone can give you substantial tax breaks and preferential tax treatment. Investing in such areas would make you eligible to defer payment of taxes on the sale of stock, business assets, or any property by investing the proceeds in a qualified opportunity zone.
Investing in such opportunity zones can significantly enhance your savings on taxes through some highly-beneficial tax breaks. While investing in economically thriving zones can be progressive, it does not save you any taxes on your gains or sales. So, if you wish to decrease your costs and increase your profits along with doing some good to the society, then organizing as a qualified opportunity zone fund can spur your business growth at low investment costs.
There is much more to know about opportunity zones like the location of qualified zones, census tract numbers for specific addresses, type of payments that can be deferred as part of the new tax incentive scheme, etc.
If you wish to explore all the tax-saving aspects of investing in an opportunity zone and how you may make the most of the new tax incentive scheme, then feel free to contact your MyTaxFiler expert and take a 360-degree tax tour around your opportunity zone investment plans.
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