The Opportunity Zone program was created to revitalize economically distressed communities using private investments rather than taxpayer dollars (government funds.) To stimulate private participation in the Opportunity Zone program, taxpayers who invest in Qualified Opportunity Zones are eligible to benefit from capital gains tax incentives available exclusively through the program.
Opportunity Zones (OZ) are census tracts generally composed of economically distressed communities that qualify for the Opportunity Zone program, according to criteria outlined in 2017’s Tax Cuts and Jobs Act. OZs cannot be redesignated or changed according to current law. Riverside County has 49 census tracts that have been designated as Opportunity Zones. These zones can be found on the Riverside County OZ map or on RivCo Prospector. Both of these maps display the OZs and have address search sections so you can see if a specific address is eligible for OZ tax incentives.
OZs are probably best understood not as a new grant program but as a new investment tool - similar to the home mortgage interest deduction that creates tax preferences, which then drive individual and market behavior.
With minor exceptions, the federal statute is not prescriptive in terms of the types of qualified investments, from affordable housing to clean energy to infrastructure to small business to workforce. This provides flexibility - as well as the need - to craft local and state strategies that will focus these investments to ensure they deliver living wage jobs, increase affordable housing, prevent unwanted gentrification and build resilient communities.
The exceptions include investments in so-called sin businesses. Golf courses, country clubs, massage parlors, hot tub and sun tan facilities, race tracks and gambling facilities, and stores that sell alcohol for consumption off the premises are considered sin businesses.
What Is A Qualified Opportunity Fund?
A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an OZ and that utilizes the investor’s gains from a prior investment for funding the Opportunity Fund. It is the only way to invest in OZs that qualify for tax incentives.
A Fund must hold at least 90% of its assets in qualifying property. The policy enables funds to be responsive to the needs of different communities, allowing for investment in operating businesses, equipment, and real property.
For example, funds can make equity investments in or purchase the stock of a company if substantially all (70%) of the company’s tangible property is and remains located in an OZ. Funds can take interests in partnerships that meet the same criteria.
Funds can also invest directly in qualifying property, such as real estate or infrastructure, if the property is used in the active conduct of a business and if either the original use of the property commences with the fund or the fund substantially improves the property within 30 months.
Qualified Opportunity Funds can be set up by any taxpaying individual or group as long as the Fund is set up as a partnership or corporation (an LLC counts for this) and an 8996 form is submitted to the IRS with their federal income tax return for the taxable year.
Incentives And Benefits Of Opportunity Zones
Deferral
A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized by the date on which the opportunity zone investment is disposed of or by December 31, 2026 - whichever date is earlier.
Exclusion
A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
Exemption
A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.
Investment Rules and Guidelines
There is no minimum or maximum investment required to qualify for OZ tax incentives. The qualifying investments are any type of short term or long term capital gains. These gains must be invested in a Qualified Opportunity Fund within 180 days of being recognized. Non cash property can be invested as well, but it may not be fully eligible for the tax incentives.
90% of the Qualified Opportunity Fund’s asset must be eligible Qualified OZ property, including stocks, partnership interest or business property (so long as property use commences with the fund, or if the fund makes significant improvements to the qualifying property.) Original use property as defined is property that was first used in the OZ as part of the fund’s assets.
A Qualified Opportunity Fund is tested for compliance with these guidelines by the IRS and is penalized if it does not meet the standards. One test is the 90% asset test. The other is the 50% gross income test. This means that the fund’s businesses must make at least 50% of their gross income within OZs (it does not have to be just one OZ.) This test must be passed or the fund must qualify for one of the three safe harbors listed below in order to be a Qualified Opportunity Fund in good standing.
50% of the services performed (based on hours) for such business by its employees and independent contractors are performed within OZs.
50% of the services performed (based on amount paid) for the business by its employees and independent contractors are performed in the OZs.
The tangible property of the business that is in the OZs and the management or operational functions performed for the business in the OZs are each necessary to generate 50 percent of the gross income of the trade or business.
The final regulations have recently been published. For more information, click here.
County of Riverside Programs and Services
Foreign Trade Zones
U.S. Foreign-Trade Zones (FTZ) are considered outside of U.S. commerce for Customs purposes. This enables companies to defer duty payments on merchandise until it is entered into U.S. commerce. If the merchandise is subsequently re-exported from the FTZ, no Customs entry is filed, and no duty paid on the merchandise.
BUSINESS ASSISTANCE
Riverside County Business Assistance NOW Program
We understand working with some local government processes can be complicated and confusing at times. Through the Business Assistance NOW Program, the County of Riverside’s Economic Development business support team will work closely with the County’s Ombudsman to provide a clear path to navigating Transportation Land Management Agency’s Planning and Building and Safety departments to get your business established and growing within Riverside County.
The Business Assistance NOW Program will support your business with occupancy permit assistance, financial resources, hiring and training, and more.
Visit the Business Assistance NOW request portal at: https://rivcoed.org/business-assistance-now-program.
EMPLOYMENT AND TRAINING INCENTIVES
Riverside County Workforce Development Centers have many services and programs available to businesses, all of which are free to utilize. Riverside County Office of Economic Development works in partnership with the Workforce Development to provide employment resources and assistance.
The Workforce Development Center also offers training incentives that assist in offsetting the costs of training new employees or retaining your existing employees.
For more information, visit: https://rivcoworkforce.org/
RECYCLING MARKET DEVELOPMENT ZONES
The California Integrated Waste Management Board has created a low-interest revolving loan fund to provide direct loans to businesses that use post-consumer or secondary waste materials to manufacture new products. To be eligible to apply for a loan, the project must be located within the boundaries of a Recycling Market Development Zone (RMDZ). Riverside County has one zone: Riverside County RMDZ. (The zone is all of Riverside County except the cities of Menifee and Indio.)
SMALL BUSINESS DEVELOPMENT PROGRAM
There are many small business development programs
in Riverside County that offer assistance and support to small businesses such as the Small Business Administration (SBA) and Inland Empire Small Business Development Center (IESBDC.)
INDUSTRIAL DEVELOPMENT BOND
Provides small-to medium-sized manufacturers money for land purchases, building construction, facility expansion, new production equipment acquisition, and solar and energy conservation retrofits. Benefits of IDB financing include below market interest rates, and long-term financing.
UTILITY INCENTIVES
Several utility companies and cities within the county have utility incentives set up for both residential and commercial projects. For more information about utility incentives specific to an area, contact Riverside County Office of Economic Development.