Creating Opportunities: New zones spur job creation, reduce tax burdens for businesses

Last month, the U.S. Department of the Treasury and the Internal Revenue Service approved nine new Opportunity Zone designations that are expected to induce investments in new job creation, attract new businesses and reduce tax burdens on existing businesses.

“Opportunity Zones were strategically identified by local communities to help spur investment in areas that could benefit most,” said Kris Klein, economic development specialist at the Lansing Economic Area Partnership. “Investments directed through ‘Opportunity Funds’ could help with redevelopments and reinvestment within the designated zones, potentially creating new jobs through expanding current businesses or attracting new ones.”

Michigan Gov. Rick Snyder, with help from the Michigan State Housing and Development Authority and Michigan Economic Development Corp., nominated 288 eligible communities in the state. Of the nominees, nine were selected, including four municipalities in Ingham County: Lansing, East Lansing, Delhi Charter Township and Meridian Charter Township. 

The remaining five areas are Bingham Township and St. Johns in Clinton County as well as the Eaton County communities of Charlotte, Carmel Township and Eaton Township.

Opportunity Zones were decreed in the 2017 Tax Cuts and Jobs Act and were created to incentivize patient-capital investments in low-income communities cut off from capital that have seen little or no business growth. The chosen communities must also be either a low-income area with 20 percent or more people at the poverty level or be contiguous; meaning they are directly next to a low-income community and have income levels less than 125 percent of the adjacent low-income community.

One of the most attractive parts of an Opportunity Zone to existing and potential newly attracted businesses is the potential tax benefits of the program. These include the following:

  • Temporary deferral of inclusion in taxable income for capital gains. A business reinvests into a fund. The deferred gains must be documented on the date an Opportunity Zone investment is disposed of or by Dec. 31, 2026, whichever comes first. 
  • A reduction for any capital gains reinvested into a fund by 10 percent if the investment is held five years, and they get 5 percent more for holding it two more years, so a possible 15 percent tax savings is possible.
  • Permanent elimination of capital gains from the taxable income of the gains, if they sell or exchange an investment in a fund and it was held for at least 10 years; the gains must be accrued after investment was made in the fund.”The tax incentive is a reduction, and possible full exemption, in federal capital gains tax for investing capital gains in an Opportunity Fund,” said Klein. “This is a federal program, so utilizing this program will not reduce local or state tax obligations. However, investments by a fund could ultimately increase local tax revenue by financing new development and reinvesting in existing businesses and buildings, leading to the creation of new jobs and property taxes in our region.”

She added that the Opportunity Zone program could reduce the tax burden of businesses if they participated in an Opportunity Fund or were the recipient of investments through a fund. These funds could be from new local investments, though most are likely to be through funds financed via regional or national sources.

The tax incentive thereby provides the most benefit to those businesses that hold onto investments for at least 10 years. Michigan was one of 18 states the Treasury Department approved in the first round of the Opportunity Zones program.

Another aspect of the Opportunity Zones program is the investment incentives for businesses. If a business decided to take advantage of the program, it can use the fund resources as a primary investment in several ways. 

The money could help start a new business, or it could be used to build new commercial or residential real estate or infrastructure. In addition, it could be used to invest in an already existing business if they double the investment basis over the next 30 months.

Plus, the fund incentive can be combined with existing incentives like the New Market Tax Credit program, Low-Income Housing Tax Credits or tax credits for historic rehabilitation. Additionally, funds could be used for such things as job training, which could assist an area in attracting new businesses.

“We are awaiting further guidance from the IRS and U.S. Treasury on how Opportunity Funds are to function and how we can start utilizing this new source of capital to invest in Opportunity Zones,” Klein said.

There are, however, limitations on the use of the funds. An Opportunity Fund cannot engage in any of the following “sin” businesses: any private or commercial golf course, country club, massage parlor, hot-tub facility, tanning studio, gambling or racetrack facilities, or anywhere that the main venture of the business is selling alcoholic beverages to be consumed elsewhere.

Klein said that the main reason the Opportunity Zones are a positive for Michigan is because “the program can open up new sources of capital to our region and state to assist with the financing of projects in areas (zones) that communities have determined to be in the most need of investment.”

The bottom line is that the funds and tax incentives via the Opportunity Zones program will help the chosen areas make improvements that will continue to help Michigan thrive and prosper so its residents can do the same.

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