This blog post is meant as an introductory primer for community planners and local small business owners. Investors are encouraged to seek their own professional counsel. The Cumberland County Improvement Authority has a program planned for bankers and Realtors on May 3 that will discuss the local Opportunity Zones.
Following the passage of the federal tax reform law effective in late 2017, community business planners turned their attention to the law’s likely local economic implications, especially the redevelopment of depressed segments of our region of southern New Jersey. Tax law has long been used as an incentive to spur investment for economic redevelopment. The Tax Cuts and Jobs Act continues this tradition by introducing Opportunity Zones and enhancing the financial incentive to use Qualified Small Business Stock.
Cumberland County, New Jersey hosts three of the state’s 75 government-designated Opportunity Zones: Bridgeton, Millville and Vineland. One of the primary drawbacks of the Opportunity Zone proposal is that the locations of investment projects are limited by law. The primary advantage is that this program allows passive investment; for example the purchase and redevelopment of land for industry.
The Qualified Small Business Stock Opportunity is not new to the 2017 law. It existed and was modified through former tax legislation. The Tax Cuts and Jobs Act simply altered the tax rates for the required C corporations that now make this format financially preferable to other investment options.
From the business owners’ and community’s perspective the goal is the same: attract new investment capital from sources previously unavailable.
From the investors’ perspective, the goal of these two programs is also the same: generate safe high tax-free investment returns. In some cases the investment returns will be “low tax” rather than “tax free” but this log post only says “tax-free” as a writing shortcut. These programs, like any other investment program, are not guaranteed to produce high positive investment returns. In fact, the loss of investment principle is possible.
This table is meant to contrast the two programs from a simplified high level perspective in a simple table format.
|Opportunity Zones||Qualified Small Business Stock|
|Internal Revenue Code Section||1400Z||1202|
|Location of project||Restricted and limited||Anywhere|
|Size of business||Any size||Restricted to businesses with less than $50 million assets|
|Holding Period for tax-free gains||10 years||5 years|
|Type of business entity||Any||C corporation|
|Type of business operated with funded projects||Any||Active small businesses, some types like law and accounting firms are restricted|
|Tax goal||0% on qualified long term capital gains||21% for current earnings, 0% for capital gains on sale of stock up to $10 million|
It is possible to combine and use both programs together in one project. This is currently a ‘hot topic’ of discussion among business planners. Of course, business project and structure planning should consider all of the stakeholders’ interests and as many of the potential risks as are visible at that early planning stage.
Crowdfunding is another ‘hot topic’ in this field of tax-advantaged investing. The potential to bring tax-free long term investment returns to small investors is inspiring but largely untested at this point.
I am now working with the nonprofit business Baysave to help launch the first of these community investment projects and welcome the opportunity to speak with community planners, investors and business owners about their plans to make the most of these tax-advantaged financing opportunities.