Excerpted from Lexology by Sullivan & Worcester LLP
How will the United States recover from the COVID-19 pandemic? At least part of the answer may be by making a few critically important tweaks to the Opportunity Zone tax incentives contained in Code Section 1400Z-2 (the “OZ Act”).
The OZ Act was specially designed to promote economic development in targeted locations, and so it is a natural tool for Congress to use as it seeks to promote a nation-wide business recovery. Many of us who have been active in the OZone world have discussed ad nauseum how to modify the OZ Act so that it can be used both to accelerate relief for distressed communities in designated opportunity zones and to help small businesses whose fortunes have been decimated by the effects of the COVID–19 pandemic.
Two members of the House of Representatives from opposite sides of the aisle, John Curtis R – Utah and Henry Cuellar, D – Texas, have introduced a bill entitled “COVID-19-Impacted Small Business Opportunity Zone Act” (“SBOZA”), which would extend the benefits of the OZ Act to “qualified small businesses,” while also proposing a handful of modifications that, if adopted, would dramatically enhance the ability of the OZ Act achieve its public-policy objectives.
The SBOZA would modify existing law in four critical areas:
1. Small Businesses Affected by Covid-19. A new category – Qualified Small Businesses – would be accorded the status of Qualified Opportunity Zone Businesses (“QOZBs”) without needing to be located in a designated opportunity zone. Thus, investors in these businesses through Qualified Opportunity Funds (“QOFs”) would be eligible for the tax benefits under the OZ Act.
A “Qualified Small Business” is any trade or business whose gross receipts for the relevant taxable year does not exceed $999,999, (i.e., truly “small” businesses with under $1 million in annual gross receipts), if such business has experienced certain broadly defined adverse effects as a result of the spread of, or the public’s or any government’s response to, COVID-19. The definition of “relevant tax year” which contains two apparent drafting errors — “means the last taxable year which ends before the date on which the qualified opportunity zone fund [sic] acquires the qualified opportunity fund property [sic] to which the trade or business relates.” (Based on the context of the proposed legislation, one could conclude this means the date on which a QOF invests in “qualified opportunity zone property,” i.e., a Qualified Small Business. However, this language will probably need to be clarified when and if the Congress moves forward with this legislative proposal.) By limiting these expanded benefits to investments made in the one-year period beginning on the date of enactment, the SBOZA is designed to push money quickly into Qualified Small Businesses.
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