Following the release of the second tranche of federal Opportunity Zone regulations by the Treasury Department in April 2019, investors and community stakeholders were emboldened by the clarity provided by those regulations to further explore ways in which the tax incentive can spur economic development in the communities that truly need it. Recognizing the momentum generated by the release of these regulations, state and local government officials have stepped up their efforts to identify thoughtful and creative approaches to further incentivize development in Opportunity Zones. While much of the media coverage regarding Opportunity Zone investment focused on high-profile projects in gateway markets, many state and local governments are working diligently to attract investment to a broader swatch of Opportunity Zones.
The vast majority of states conformed their tax codes to the federal Opportunity Zone legislation and proposed regulations. As a result, investors in conforming states may receive state tax incentives similar to those available under the federal tax code. There are four states that have not conformed their tax codes to the federal legislation and regulations, including California. Investors seeking to develop Opportunity Zone projects in California will have to pay the state capital gains tax of 13.3% on their investments, which could negatively impact much of the tax benefits derived from the federal Opportunity Zone legislation.
Additionally, many state and local governmental officials and community stakeholders have identified new and innovative incentives to spur Opportunity Zone investment beyond state tax code conformity. Since the Opportunity Zone incentive was designed to provide a flexible framework for driving investment into targeted communities, state and local officials can tailor and refine additional incentives to meet identified community needs. Ohio has approached the pursuit of Opportunity Zone investment capital both legislatively and through stakeholder engagement.
For example, Ohio's current operating budget, signed into law by Governor Mike DeWine in July 2019, provides for a 10% nonrefundable income tax credit to Ohio Qualified Opportunity Funds who invest in the state's Opportunity Zones. The income tax credit is equal to 10% of the capital gains reinvested, up to $1 million, into Qualified Opportunity Funds operating within Ohio. The state intends for the early-stage investment credit to provide an important inducement to drive investment into Ohio's Opportunity Zones given that the federal tax incentive is deferred for a requisite minimum number of years. To be eligible for this tax credit, the Ohio Qualified Opportunity Fund must hold 100% of its invested assets in an Opportunity Zone located in Ohio.
States like Indiana (www.opportunityinvestmentconsortium.com/become-an-investor) and Ohio (www.opportunityzone.ohio.gov) also have established web-based Opportunity Zone portals that facilitate connections between communities and businesses seeking investment and investors seeking viable projects. The portal provides communities with the ability to upload specifics about community needs, document available local incentives and to provide contact information with economic development personal. Additionally, project owners and developers can upload project descriptions and details of community support for those projects. Finally, investors can search the projects submitted via the portal and use the information to find the most suitable options for their investment teams.
Many states and local communities are approaching the challenge of attracting Opportunity Zone investment similar to the examples above, examining ways in which additional tax incentives and web-based support and networking services can facilitate job creation, workforce training assistance, alternative energy development and affordable and workforce housing in Opportunity Zones. Governmental officials and community leaders recognize that achieving alignment of investor and community interest is the surest way to make good on the promise of the Opportunity Zone initiative.
Please contact the Ice Miller Opportunity Zone Team with any questions you have with respect to OZ fund investments and operations or other OZ requirements.
• This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.