New Tax Incentive for Oregon Businesses
I want to share with you an exciting new federal tax incentive created to drive investment in communities that have previously been hampered by a lack of access to capital. The potential for Oregon investors and small businesses to benefit is enormous if action is taken before March 14.
The federal Tax Cuts and Jobs Act of 2017 allows Oregon’s Governor to nominate up to 86 Opportunity Zones in our state. The final selections will be made by the U.S. Department of Treasury from this list. These Opportunity Zones are similar to enterprise zones and are designed to draw private investment to low-income communities.
Business owners around the state have until March 14 to provide input to Business Oregon on the best locations for these 86 Opportunity Zones.
To understand why these Opportunity Zones are so important, consider the investment potential they offer. Under the new federal tax laws, investors with currently unrealized capital gains can move those gains “tax deferred” into an “Opportunity Fund.” Opportunity Funds (O-Funds) are expected to be created by CDFIs (Community Development Financial Institutions).
Once placed in an O-Fund, the amount invested will be available to invest in property and improvements in Opportunity Zones, with some limitations. Please consult a professional tax advisor for specifics, but our understanding is that investors who leave their money in the O-Fund for 10 years will qualify for a 15% decrease in capital gains taxes on the original sum they invested. Plus, any gains earned through the fund’s investments are tax-free under current state and federal law.
To understand the significance of this new federal incentive for investing in an Opportunity Zone, consider the following example:
“Susie has $100 of unrealized capital gains in her stock portfolio. She decides in 2018 to reinvest those gains into an O-Fund that invests in distressed areas of her home state, and she holds that investment for 10 years. Susie is able to defer the tax she owes on her original $100 of capital gains until 2026. Further, the basis is increased by 15% (effectively reducing her $100 of taxable capital gains to $85). Thus, she will owe $20 (23.8% of $85) of tax on her original capital gains when the bill finally comes due. In addition, since she holds her O-Fund investment for at least 10 years, she owes no capital gains tax on its appreciation. Assuming that her O-Fund investment grows 7% annually, the after-tax value of her original $100 investment in 2028 is $176. Susie has enjoyed a 5.8% effective annual return, compared to the 2.8% an equivalent non-O-Fund investment would have delivered.” (Credit: Economic Innovation Group Fact Sheet)
Oregon can only nominate up to 86 Opportunity Zones – approximately one-quarter of the areas that actually qualify as Low Income Census tracts (LICs). Potentially eligible LIC areas are located in most regions of the state—both urban and rural. You can see a map here.
Business Oregon is taking the lead on this process. They are actively seeking input and nomination requests from interested Oregonians. Business Oregon must receive all of these nominations by March 14. They will then work with the Governor’s office to develop a final nomination list to be sent to the federal government.
My understanding is that the Opportunity Zones that will be successful in the nomination process should already have the potential to handle outside investment. They may already have infrastructure in place and some zoning ready to go, and they may be adjacent to enterprise zones if they otherwise qualify.
In short, Oregon’s Opportunity Zones will create new opportunities for investment and job creation. If you are an Oregon business owner, please consider whether this new federal tax law could benefit your business. Recommendations should be sent to Business Oregon, and more information is available here.