Over the past 30 years, two specific programs have been established to spark economic vitality: First, Qualified Small Business Stock (QSBS) and more recently, Opportunity Zones(OZ).
QSBS has incentivized entrepreneurs and investors alike to invest in small businesses. Taxpayers holding eligible stock have been able to recognize up to a 100% tax exclusion on capital gains from the sale of their shares. QSBS has rewarded those who drive innovation and create jobs by starting or funding small businesses.
Opportunity Zones were created by the Tax Cuts and Jobs Act in 2017 to address socioeconomic disparities in underprivileged areas. For many disadvantaged areas, the incentive to start a Qualified Opportunity Zone business has created jobs and spurred local economies in places that previously were neglected with limited economic activity. The intention of Opportunity Zones was to incentivize investment in the people and communities living in these disadvantaged areas.
The Biden Administration has found Opportunity Zones to be limiting as they stand today and argues,
“We cannot close the racial wealth gap if we allow billionaires to exploit Opportunity Zones tax breaks to pad their wealth, rather than investing in projects that benefit distressed low-income communities and Americans that are struggling to make ends meet.”
Biden’s original Build Back Better platform outlined several initiatives that would reform the current OZ programs to “better serve” minority communities living in these regions. The proposal was three-fold:
- “Incentivizing Opportunity Funds to partner with non-profit or community-oriented organizations, and jointly produce a community-benefit plan for each investment, with a focus on creating jobs for low-income residents and otherwise providing a direct financial impact to households within the Opportunity Zones.
- “Directing that Opportunity Zone benefits be reviewed by the Department of Treasury to ensure these tax benefits are only being allowed where there are clear economic, social, and environmental benefits to a community, and not just high returns — like those from luxury apartments or luxury hotels — to investors.
- “Introducing transparency by requiring recipients of the Opportunity Zone tax break to provide detailed reporting and public disclosure on their Opportunity Zone investments and the impact on local residents, including poverty status, housing affordability, and job creation.”
Even though the QSBS initiative has been successful enough over the past 3 decades to see continuous and increasing bipartisan support, and despite the fact that it was originally pronounced safe, a proposed amendment to QSBS would slash the incentive for investors and founders in order to fund less than 1% of the BBBA.
As the QSBS community loses trust in the establishment which once supported and rewarded these initiatives, we wonder if Opportunity Zones are next on the chopping block and if they’ve truly been given the opportunity to prove their worth. It is evident to us and many others that the long-term negative effects of a decreased QSBS incentive would harm the entrepreneurial economy that America thrives on. We believe these under-priveledged areas would suffer in the same way if investors are no longer incentivized to make innovative investments for their future communities.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.