Opportunity Zones, Part I: New Opportunity to Save Taxes While Doing Good

The new tax law provides a tax incentive for investments in “Opportunity Zones” in order to stimulate economic development in disadvantaged neighborhoods.

The New York Times reports that one in every six Americans lives in a distressed community, where the poverty rate is above the national average. The Tax Cuts and Jobs Act of 2017 (TCJA) has provided investors with a new incentive to do something socially responsible and help these communities (and to avoid paying capital gains tax in the process).

There is a very small section of the new tax law that until recently received very little attention in the media, but which could have a tremendous impact on U.S. investments. In a mere 2,100 words, Congress enacted “Opportunity Zones,” a complex new investment program that provides federal income tax benefits to taxpayers who invest in businesses located in certain economically challenged areas. See 26 U.S. Code § 1400Z-1 and 26 U.S. § 1400Z-2.

A little background

This isn’t the first time that a program like this has been tried. The use of tax incentives to promote community investment originated in England during the 1970s, and were part of the U.S. presidential campaigns of both Ronald Reagan and Bill Clinton. Although quite different in structure and implementation, the Empowerment Zones and Enterprise Communities Act of 1993 is reported to have had a somewhat positive effect on a number of “zone cities.” However, these programs were generally fraught with problems – they applied to a limited number of communities, were overly complicated, and usually involved a lot of governmental red tape that resulted in extensive delays.

The groundwork for the current Opportunity Zones Program was set by Steve Glickman, who served as senior economic advisor to President Obama until 2013. Designed as an attempt to assist communities that have not recovered from the Great Recession of the last decade, the Opportunity Zones Program is a bipartisan measure that is expansive and flexible and includes safeguards to ensure that the opportunity zone funds are directed to the right places.

What are opportunity zones?

The U.S. Department of the Treasury has certified and published a list of 8,761 “qualified opportunity zones” in the U.S. and U.S. territories, and 35 million Americans live in them. These are economically challenged areas with a high unemployment rate and an average poverty rate of more than 32%. Many have had a poverty rate of 20% or more for the last 30 years. They exist in every U.S. state. Almost the entire territory of Puerto Rico is designated an opportunity zone.

In our next few posts, we will review the tax benefits of the Opportunity Zones Program, qualified opportunity zone businesses, and the tax rules surrounding opportunity zone investments.