Opportunity Zones: Learn to Leverage Investment Potential in Your Small Business
Did you know that your startup could infuse economic potential in low-income areas while also qualifying for tax incentives? It can thanks to a federal program. “Opportunity zones” are areas that have been selected for economic revitalization. In Louisiana alone 150 tracts have been designated as opportunity zones.
Tax credits are the prime benefit of setting up your small business in one of these zones. Investors are given an opportunity to invest capital gains in a property, and in return the property isn’t taxed beyond the original investment.
For companies needing investment, opportunity zones can provide incentives for funds to invest in areas such as operating businesses, equipment, and real property. For example, if the substantial majority of a company’s property is located within an Opportunity Zone, the company can be eligible for “equity investments” for new or expanding businesses.
Sound too good to be true? James Chappell, executive director of economic competitiveness at Louisiana Economic Development, and Dan Walter, an attorney at Stone Pigman, assure us it isn’t. At Tech Park Academy, Chappell and Walter explained how businesses can qualify for the opportunity zone program and how to leverage it.
What Types of Property Qualify for Opportunity Zones?
The term “property” brings up images of land or real estate, but these aren’t the only types of property that qualify for the opportunity zone program. A business that opens in an opportunity zone qualifies for investment from an “opportunity fund.” Investments can be made in the stock of companies located in opportunity zones, in partnership with interests in qualified businesses and in business properties located in an opportunity zone.
This means that if you establish your startup in an opportunity zone, your organization can qualify for these long-term, top-tier tax credits. The opportunity zone program is beneficial to those who wish to defer and reduce taxes on their capital gains.
How Does the Opportunity Zone Program Work?
The federal opportunity zone program is designed to defer and reduce property taxes from capital gains investments. When an investor receives capital gains from a property sale, those gains can be rolled into an opportunity fund (currently until as late as 2026). Taxes on these gains will be temporarily deferred when invested in an opportunity fund.
After five years the taxes will be reduced by 10%, with an additional 5% (for a total of 15%) after seven years. This percentage of the original gain will be excluded from taxation. A property that’s held for 10 or more years then qualifies for a tax exclusion on the investment’s appreciation. This program offers huge potential savings in tax credits.
Who Can Contribute to an Opportunity Fund?
Anyone who has capital gains to invest can create and contribute to an opportunity fund. These funds are intended to encourage investments from the private sector in low-income areas. Any investor can establish a fund, as long as capital gains are deposited.
A business owner can invest their own capital gains in their own qualifying business. In order to do so, however, the same rules apply: The investment must be made in an opportunity fund and differentiated as an investment as opposed to simply transferring your own money into the business.
Opportunity funds are a huge source of potential tax savings. Consider locating your business in an opportunity zone so you can be fiscally responsible while helping to drive the local economy.