Members of Congress who pushed for the "opportunity zone" provision in the 2017 federal tax law said it would help businesses and entrepreneurs in low-income communities. The tax break rewards investors for spending capital gains on businesses or real estate in more than 8,000 economically distressed neighborhoods selected by governors.
The incentive "will unlock new private investment for communities where millions of Americans face the crisis of closing business, lack of access to capital and declining entrepreneurship," said a bipartisan congressional group -- Sens. Tim Scott, a South Carolina Republican, and Cory Booker, a New Jersey Democrat, and Reps. Pat Tiberi, an Ohio Republican, and Ron Kind, a Wisconsin Democrat -- in announcing the idea.
But almost two years after the tax break became law, and almost two months after the Trump administration clarified how private equity firms, venture capitalists and other investors can qualify for the tax break, only a handful of people have started funds that focus on operating businesses. Many are still trying to figure out how to satisfy both the IRS and investors eager for high returns.
Meanwhile, real estate-focused funds have already raised billions. And real estate companies are cashing in. For example, Kushner Companies, the family business of President Donald Trump's son-in-law, Jared Kushner, has been buying up property in the zones, according to the Associated Press.
Confusing U.S. Treasury Department rules held business-focused funds back, said John Lettieri, president and CEO of the Economic Innovation Group, a public policy group in Washington, D.C., that lobbied for opportunity zones. Now that the agency has issued more guidance, Lettieri said, "opportunity funds that are geared toward investing in local businesses are going to proliferate."
But the tax break has always been easier to apply to real estate. "The truth is, it's a tax break that's place-based," said Napoleon Wallace, a former deputy secretary of the North Carolina Department of Commerce and a founding partner of Opportunity North Carolina, a group that helps expedite deals in the state.
An Uneasy Alignment
The opportunity zone tax break is several incentives in one. Investors defer paying income taxes on capital gains that they invest in special funds that, in turn, invest in real estate or businesses in the zones. After five years, investors get a tax break on those gains. After seven years, the tax break increases. And most importantly, after 10 years, they can pocket any money they earn from their zone investment tax-free.
Brian Phillips is an entrepreneur who is confident he can find promising tech startups that are already in a zone or willing to move to one. But last year, when Phillips was considering creating an opportunity zone fund focused on businesses, he was "kind of the only one."
Investors had to wait until the April release of Treasury guidelines to learn how businesses would qualify as being in a zone for tax purposes. The guidelines said businesses need to perform at least half their services in a zone, pay half their wages in the zone, or generate half their income from a mix of property and management functions in a zone.