Originally designed to encourage investors to help the disadvantaged, the Tax Cuts and Jobs Act was signed into law in 2017. With this law came the creation of Opportunity Zones (OZ), socioeconomic locations identified by the government and designated for new business development with the intention of stimulating local economies. New business ventures that are built in these designated regions create new jobs and drive economic growth in neighborhoods. In exchange, Qualified Opportunity Zone Businesses (QOZB) would be given tax incentives such as being able to defer tax on investor’s previous eligible gain as long as there’s an equivalent amount that is reinvested in a Qualified Opportunity Fund in a timely manner. Furthermore, if the investment in this qualified opportunity fund is held for at least 5 years, the taxpayer can exclude 10% of the gain.
Find more about opportunity zone tax incentives here.
What Many See as a Economic Revitalization
All of this was portrayed as a win-win: those less fortunate would have the opportunity for jobs and a more revitalized community. Meanwhile, investors would be incentivized to invest in these otherwise underdeveloped markets by way of tax breaks.
The False Reality of Opportunity Zones
It is the opinion of some that what started out as a plan to revitalize socioeconomically-disadvantaged communities has not always produced these desired results. Claims that investors have found tax break in the system and are establishing businesses within the parameters of the tax code that serve more to build their portfolios than to build the community.
David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy and senior fellow in economic studies at the Brookings Institution, argues the government was once criticized for having too many limitations to encourage investment and now the opposite is true. He suggests there is not enough oversight as the program stands today.
Wessel’s recent NY Times opinion piece describes how businesses—like self-storage businesses—which create very little jobs, are popping up as opportunity zone businesses. Luxury hotels are another category of businesses providing little back to the communities in these neighborhoods.
“Big fixes require Congress — to strip the opportunity zone designation from tracts that aren’t truly low income, restrict investments eligible for the tax break, impose reporting requirements on opportunity zone funds.”
The People Behind Opportunity Zones
What is important to take into consideration is, Opportunity Zones have stimulated the economy and produced jobs in places that would not otherwise exist today. Eliminating the benefits of this program could have long-term consequences. Losing investors in these markets will take away from the collective good cause Opportunity Zones have provided the economy with by producing jobs and innovation.
Join our coalition to let Congress know that eliminating tax incentives such as QSBS and Opportunity Zones will greatly harm innovation.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
