Qualified Opportunity Zones will capitalize on rural America’s “can-do” attitude.
SINCE AMERICA'S founding, we have used our “can-do” attitude to grow crops that feed our communities and our country. We have used our “can-do” attitude to establish and lead during America’s manufacturing revolution. And we have used our “can-do” attitude – along with our appreciation of quality education – to provide opportunity for America’s future.
But in many small and rural communities, we’ve also faced some serious challenges. As a lifelong Wisconsinite, I know how fragile the economic foundations of many communities and small businesses are across Wisconsin. For years, many hardworking Wisconsinites in rural communities have seen a lack of investment in their hometowns and felt that the deck was stacked against them.
But that’s changing. Now we’re seeing a movement to invest in rural America – and invest in opportunity.
Recently, a program creating economic opportunity zones, that was part of a bipartisan bill called Investing in Opportunity Act of 2016, was passed into law as a provision in the new federal tax law. With colleagues in the House and Senate – Sens. Tim Scott (R-S.C.) and Cory Booker (D-N.J.), and former Rep. Pat Tiberi (R-Ohio) – we have fought for a new approach to connect struggling communities with the private investment they need to thrive. Millions of Americans live in communities facing crises such as closing businesses, lack of access to capital and limited entrepreneurship opportunities. We know we can solve these problems if we work together.
This bipartisan legislation helps fund a new generation of entrepreneurs and enterprises in economically distressed areas of the country. It assists in overcoming barriers to investment by providing temporary capital gains deferral in exchange for reinvestment in distressed communities. In addition, it encourages investors from across the nation to pool resources through newly created Qualified Opportunity Funds established specifically to make investments in distressed communities. The legislation also provides incentives for investors to make long-term commitments to these communities by increasing the size of the tax benefit the longer they stay.
The bottom line: creating opportunities in rural communities requires partnerships. Rural America’s “can-do” attitude paired with the $2.3 trillion of untapped capital held by U.S. investors could be the beginning of the rural renaissance. Wisconsin’s Third Congressional District is now home to 15 designated Qualified Opportunity Zones in nine counties across western and central Wisconsin. For the next 10 years, investors across America will have the opportunity to invest in those Qualified Opportunity Funds, buoyed by the famous Midwest work ethic we’re so proud of. When discussing Qualified Opportunity Zones, it is important to remember that rural communities are not depressed or repressed communities. Many of them are simply places that could stand to be reminded that America appreciates their “can-do” attitude. Together, we can work with the people of Adams County to lower the poverty rate and increase the number of high school graduates. We need to partner with our neighbors in the city of Nekoosa to establish the foundations for a successful business. And we need to work with families in the cities of Prairie Du Chien and Menomonie to create jobs and increase access to affordable housing.
The most sustainable way to effect these changes – in Wisconsin and the rest of the country – is by investing in communities and incentivizing job growth in areas of our country that have faced economic challenges. This newfound economic innovation will encourage new businesses to plant roots in these communities, and our towns and cities will flourish.
Businesses and investors are encouraged to step up and join us in doing everything we can do to help rural communities across Wisconsin and the nation.
By Ron Kind, U.S. Representative for Wisconsin’s 3rd Congressional District
‘Opportunity Zones’ in the New Federal Tax Law: What They Are and How They Work
A provision in the new federal tax law passed in 2017 focuses on the creation of “Opportunity Zones” to encourage investment in parts of the U.S. characterized by high poverty and economic underperformance. As is sometimes the case with new legislation, the statutory text leaves many important questions unanswered about the mechanics and the particulars of the program. However, key elements of the law are in place, and they are summarized here.
The Opportunity Zones provision offers potentially significant tax incentives for investors, including non-U.S. persons, to help attract funding for businesses in low-income areas. Those incentives focus largely on channeling capital gains into Qualified Opportunity Funds that invest in Qualified Opportunity Zone businesses in eligible communities. While the tax incentives are focused on investors, the benefits of the program also accrue to developers and entrepreneurs who are seeking financing for their projects and businesses. The tax benefits could reduce the cost of capital for these projects, making them more financially viable.
Qualified Opportunity Zone businesses can be involved in real estate, retail, manufacturing, food, energy, research, services and other activities. Individuals and businesses can delay paying federal income tax on capital gains until 2026; in addition, they can enjoy up to a 15 percent increase of their basis in those gains by investing in Qualified Opportunity Funds that in turn, invest at least 90 percent of their assets in businesses or tangible property located in low-income areas. In addition, gains on investments in the funds can be free of federal income tax if the investment is held for at least 10 years.
Key Elements of the Opportunity Zone Program
The Tax Incentives
There are three types of tax incentives:
- Investors can defer paying tax on capital gains until 2026 by investing in Qualified Opportunity Funds.
- The basis in the deferred capital gains is increased by 10 percent after 5 years and an additional 5 percent after 7 years, for a total of 15 percent.
- Gains on Qualified Opportunity Fund investments held for at least 10 years can be tax free.
To receive the incentives, the following parameters apply:
- Investors channel capital gains into Qualified Opportunity Funds.
- Qualified Opportunity Funds invest at least 90 percent of assets into Qualified Opportunity Zone property.
- Qualified Opportunity Zone property includes partnerships, corporations and tangible property operating in or being used in Opportunity Zones.
- Opportunity Zones are low-income census tracts that are either urban or rural and that were nominated by governors and designated by the secretary of the U.S. Treasury.
- Qualified Opportunity Fund developers may receive fees and carried interest for managing the funds.
By Mary Burke Baker (email@example.com), government affairs counselor, K&L Gates LLC