You can't just base a business in a QOZ and call it a QOZB. It needs to generate 50% of its gross income from within the zone and 40% of its intangible property (e.g. software) must be used for business within a zone.
Further, there are restrictions on what kind of business it can be. It can't be, for example, a golf course or a liquor store.
The "50-percent of gross income test" is actually that you have to meet 1 of 3 standards[1]:
Qualified Opportunity Zone Business
QOF 50-percent of gross income test
Q56. What is the 50-percent-of-gross-income test?
A56. Each taxable year, a QOZ business must earn at least 50 percent of its gross income from business activities within a QOZ. The regulations provide three safe harbors that a business may use to meet this test. These safe harbors take into account any of the following—
- Whether at least half of the aggregate hours of services received by the business were performed in a QOZ;
- Whether at least half of the aggregate amounts that the business paid for services were for services performed in a QOZ; or
- Whether necessary tangible property and necessary business functions were located in a QOZ.
Q57. Must a QOZ business meet all three safe harbors to satisfy the 50-percent-of-gross income test?
A57. No. A QOZ business satisfies the 50-percent-of-gross income test if it satisfies any one of these safe harbors. For example, if 50 percent or more of all the hours of services that a business receives and uses were performed in one or more QOZs, then the business satisfies the hours of services received test and, therefore, satisfies the 50-percent-of-gross-income test.
Seems like you can, as long as you work in the office 50% of the time ("at least 50% of the hours worked by partners, contractors, and employees could take place in an OZ"), and the IP seems to be addressed by this quote from the article: "The IRS’ Final Regulations on QOZB’s gave a rather interesting but nuanced example of an intellectual property holding company with a headquarters in an QZ which DID qualify as a QOZB despite concerns about the 40% intangible property rule. This is a very relevant example for many tech companies [...]"
I'm not going to go read the IRS regulations because I'm not actually planning to implement this scheme but it seems plausible that it might work. As long as there isn't another COVID forcing everyone to work from home...
The purpose of the QOZ is to encourage investment in those areas, and it does this by favorable tax conditions.
Some of these areas are surprising, at least around me I see areas designated that aren't much different from the surrounding areas. And there are rural ones, too.
Looking at some of the ones above in street view, I can see why they're classified as they are, and I could certainly see a start-up choosing to place an office in one of those locations. Some are transit-close, even.
It’s about who owned the land in 2017 and who was governor. Some states were less corrupt than others, but as a general rule OZs were and are mostly political grift with a few legit trades thrown in for cover.
The reason that HUGE tracts of OZs make no sense is that the “for development of blighted areas” thing is very thinly veiled bullshit.
As prescribed by law, governors nominated which census tracts should be designated as
Opportunity Zones by the U.S. Department of the Treasury. To be eligible for designation, a
census tract must:
- Have a poverty rate of at least 20 percent; or
- Have a median income below 80 percent of that in the State or metropolitan area, or for
rural census tracts, 80 percent of that in the entire State; or
- Be contiguous with a census tract meeting one of the above conditions and have a
median income less than 125 percent of the qualifying contiguous census tract.
There's an opportunity zone adjacent to Palo Alto that extends into Menlo Park. It has a Four Seasons hotel in it. There are other areas nearby that could use the investment incentive a lot more IMO. Who decided on these zones? Seems totally arbitrary.
It is arbitrary. Probably created by special interest groups and the politicians that cater to them. As if taxes were good in some geographic areas but not in others.
Wow, this is awesome. So for even a small amount of money, such as in the Kara $1120 example, you simply need to have offices or even cowork in a particular area and you get to write off all capital gains taxes. I'll need to look more into this for my corporation...
Well, it's not "simply that", the corporation also needs to be registered in a particular way and the investment in that corporation needs to be done in a particular way, as the article describes - complying accurately seems tricky, but seems doable if you want to.
Infrastructure sucks relatively to almost everywhere else in the US (better than other territories, probably better than parts of Alaska). Legal system is really bad (bad hybrid of old Spanish law, 1950s American law, and nearly a century of corruption). High costs (inherent to being on an island) combined with regulatory/etc. burden raising costs.
It makes sense for completely vertically integrated businesses which are highly profitable (some software, crypto, pharma production), but it's not a place you'd put most businesses. compared to Florida/Texas (low tax low cost), a lot of other parts of the US (low cost moderate tax), or CA/NY/etc. (high talent pool, high tax).
It can be done, it's just harder, and it's probably not worth saving 20% long-term capital gains (if successful) this way vs. a higher change of a successful outcome at all otherwise. But for some specific kinds of businesses it works great.
Is this really what people strive for in the USA. To avoid contributing anything back to the country that helped them achieve everything they've ever wanted?
The government is not a charity. If they have deemed something to be non-taxable, it's because the government (and by extension, the people it represents) want to incentivize that particular activity, in this case investing in economically depressed areas.
If at some point we no longer want to incentivize that behavior, the government can simply remove the tax break. Moralizing about how people shouldn't engage in the behavior that the government is encouraging them to by offering tax incentives is beyond useless.
The author suggests operating in areas near colleges because they're developed but the students artificially depress the wages (there's a big difference between a median income of $10k for a neighborhood of families vs college students). Selling these tax laws as the will of the people is a bit of a stretch.
> If at some point we no longer want to incentivize that behavior, the government can simply remove the tax break.
Yes, as we’ve seen, it is very easy to get the government to repeal a loophole that enables a billion-dollar company to dodge a tax. Why, it is virtually child’s play! The poors just need to hire a lobbyist, outspend the tax-dodging lobbyists, and Bob’s yer uncle! The government, as you say, will simply remove the tax break.
This is why people should stop complaining about religions. Of course it's done for the tax break. You don't cede power when the government allows you to grab it. If you want your special interest group to thrive in the US, get with the program and exploit the tax loopholes before they're gone.
The US government is the worlds largest charity, it also does a lot of other things. However it accepts donations and supports the poor, arts and sciences etc.
There are even plenty of things people might want to donate too that only governments do, the Red Cross etc are hardly building space telescopes or US highways.
Except the wealthy play games like extending Harlem through central park to midtown so that they can fund building their own luxury apartments as economic development in a "depressed" area.
> If at some point we no longer want to incentivize that behavior, the government can simply remove the tax break.
But then these corrupt, America-hating billionaires will spend millions digging up dirt on you, funding your opponents, and claiming you’re sending jobs to China.
This is where your argument breaks down. Gerrymandering has completely eliminated this as a reasonable belief in most places.
Most voters don't even care about issues, they care about parties, their team. As such, they don't care or want to incentive anything except their own team winning.
> the government can simply remove the tax break.
If most people want abortion to be legal, the government can simply legalize it.
Do you also give all your information to a random caller that offers you a free cruise? I think you forgot that politicians are legally bribed to behave against the wishes and/or needs of the people.
You're right that moralizing is beyond useless. Instead let's define the bounds of our morality by our tax code. What can go wrong?
Yes. The "privatize gains, socialize losses" thing isn't just an empty meme, it's a legitimate (read: "not strictly illegal") and highly profitable strategy.
it's not completely free money - you have to invest in qualified funds/businesses, which is located in areas of low economic opportunity that the gov't wants to incentivize businesses to start operating in.
This is effectively a tax incentive to open new businesses in these somewhat remote and low-income areas. I dont think it's a bad thing if it does indeed encourage job creation and economic activity in those areas that otherwise would've stagnated.
> Is this really what people strive for in the USA. To avoid contributing anything back to the country that helped them achieve everything they've ever wanted?
You are working from a flawed model. Government spending is not tied at all to revenue. Over the past three years the federal government has dropped over 5 trillion dollars on the economy from a helicopter.
Why not take advantage of a loophole when money can and is being created out of thin air?
Capital gains tax is a parasitical tax that punishes people for being responsible with their after-tax money. It also creates massive, massive loopholes that can be abused.
The fairest solution is to scrap CGT and associated capital loss write-offs.
This allows the middle class to thrive by investing in productive enterprises and not getting taxed yet again to do so.
It's the worst kind of tax that punishes success by stealing your after-tax money.
As for your appeal to nation, the US will waste your money on slaughtering Afghanistani children with bombs and handing out cash to serial fraudsters (look up how many people on Social Security are actually real). Most tax money is wasted by government.
> This allows the middle class to thrive by investing in productive enterprises and not getting taxed yet again to do so.
The same money isn't taxed again. Only the gains on top of that.
Some sort of tax on wealth or the proceeds of that wealth is necessary, otherwise you end up with a society where only the middle class pays tax while the people who benefit the most from society, the rich, live tax-free. It's either this or a simple wealth tax.
It's a free market approach. The alternative is that the government collects money everywhere equally and then go and invest/pump money into these area. If the area is tax negative (requires more government money than it brings in), then might as well give it tax breaks; if that economic activity can break it off the cycle.
The very fact that some of these places exist for a long time; means that it's not worth it to invest in them even with the tax breaks.
I think, like most things, it’s a bell curve - the bulk of the people want to contribute a reasonable amount while some want contribute none and some extra. The glaring issue in the United States is how much capital is gained — though I prefer ‘allocated to’, as the people do the work — by a minuscule portion of the population and the paltry taxes they then pay.
The government of USA is incredibly inefficient at getting anything done.
If I had billions of dollars I would always strive to legally pay as least taxes as possible and use the funds to contribute back the country in much more efficient ways, including investing in people who are provably getting shit done.
Here's the latest of a constant firehose of misuse of funds I've seen. The gist is that a Stanford professor is basically leeching $40K of tax money at a $5000/hr rate for "consulting" about social justice and equity in schools. I'd rather give that $40K directly toward educational supplies for underprivileged students, or to a hundred tutors and therapists at $50/hr, or something else.
~$1M capital gain 9 months ago and it's too late to roll it into an opportunity zone.
I'm on the point of panic about taxes right now and still trying to sort out my expenses over the last 2 years which do include about $500k in investment in one of the poorest areas in the country. My location just happens to be gerrymandered out of the local opportunity zone though.
Readit News
Further, there are restrictions on what kind of business it can be. It can't be, for example, a golf course or a liquor store.
Qualified Opportunity Zone Business QOF 50-percent of gross income test Q56. What is the 50-percent-of-gross-income test?
A56. Each taxable year, a QOZ business must earn at least 50 percent of its gross income from business activities within a QOZ. The regulations provide three safe harbors that a business may use to meet this test. These safe harbors take into account any of the following—
- Whether at least half of the aggregate hours of services received by the business were performed in a QOZ;
- Whether at least half of the aggregate amounts that the business paid for services were for services performed in a QOZ; or
- Whether necessary tangible property and necessary business functions were located in a QOZ.
Q57. Must a QOZ business meet all three safe harbors to satisfy the 50-percent-of-gross income test?
A57. No. A QOZ business satisfies the 50-percent-of-gross income test if it satisfies any one of these safe harbors. For example, if 50 percent or more of all the hours of services that a business receives and uses were performed in one or more QOZs, then the business satisfies the hours of services received test and, therefore, satisfies the 50-percent-of-gross-income test.
[1] https://www.irs.gov/credits-deductions/opportunity-zones-fre...
I'm not going to go read the IRS regulations because I'm not actually planning to implement this scheme but it seems plausible that it might work. As long as there isn't another COVID forcing everyone to work from home...
https://cimsprodprep.cdfifund.gov/CIMS4/apps/pn-nmtc/index.a...
The purpose of the QOZ is to encourage investment in those areas, and it does this by favorable tax conditions.
Some of these areas are surprising, at least around me I see areas designated that aren't much different from the surrounding areas. And there are rural ones, too.
Looking at some of the ones above in street view, I can see why they're classified as they are, and I could certainly see a start-up choosing to place an office in one of those locations. Some are transit-close, even.
The reason that HUGE tracts of OZs make no sense is that the “for development of blighted areas” thing is very thinly veiled bullshit.
The Opportunity Zone Selection Process
As prescribed by law, governors nominated which census tracts should be designated as Opportunity Zones by the U.S. Department of the Treasury. To be eligible for designation, a census tract must:
- Have a poverty rate of at least 20 percent; or
- Have a median income below 80 percent of that in the State or metropolitan area, or for rural census tracts, 80 percent of that in the entire State; or
- Be contiguous with a census tract meeting one of the above conditions and have a median income less than 125 percent of the qualifying contiguous census tract.
[0][0] https://www.rd.usda.gov/sites/default/files/ImpactofOpportun...
The wealthy
Option B: Move to Puerto Rico, run your company from here, do Act 60, zero capital gains tax.
It's challenging to build a successful billion-dollar-exit company in PR, though.
It makes sense for completely vertically integrated businesses which are highly profitable (some software, crypto, pharma production), but it's not a place you'd put most businesses. compared to Florida/Texas (low tax low cost), a lot of other parts of the US (low cost moderate tax), or CA/NY/etc. (high talent pool, high tax).
It can be done, it's just harder, and it's probably not worth saving 20% long-term capital gains (if successful) this way vs. a higher change of a successful outcome at all otherwise. But for some specific kinds of businesses it works great.
If at some point we no longer want to incentivize that behavior, the government can simply remove the tax break. Moralizing about how people shouldn't engage in the behavior that the government is encouraging them to by offering tax incentives is beyond useless.
Yes, as we’ve seen, it is very easy to get the government to repeal a loophole that enables a billion-dollar company to dodge a tax. Why, it is virtually child’s play! The poors just need to hire a lobbyist, outspend the tax-dodging lobbyists, and Bob’s yer uncle! The government, as you say, will simply remove the tax break.
There are even plenty of things people might want to donate too that only governments do, the Red Cross etc are hardly building space telescopes or US highways.
Except the wealthy play games like extending Harlem through central park to midtown so that they can fund building their own luxury apartments as economic development in a "depressed" area.
But then these corrupt, America-hating billionaires will spend millions digging up dirt on you, funding your opponents, and claiming you’re sending jobs to China.
Not unless you're extremely rich or extremely poor, that is.
This is where your argument breaks down. Gerrymandering has completely eliminated this as a reasonable belief in most places.
Most voters don't even care about issues, they care about parties, their team. As such, they don't care or want to incentive anything except their own team winning.
> the government can simply remove the tax break.
If most people want abortion to be legal, the government can simply legalize it.
Oh wait!
You're right that moralizing is beyond useless. Instead let's define the bounds of our morality by our tax code. What can go wrong?
This is effectively a tax incentive to open new businesses in these somewhat remote and low-income areas. I dont think it's a bad thing if it does indeed encourage job creation and economic activity in those areas that otherwise would've stagnated.
Why don't people want to contribute back to an environment that enabled their success?
I have too many family members that will avoid acknowledging anything the government does for them.
"The social contract."
Deleted Comment
You are working from a flawed model. Government spending is not tied at all to revenue. Over the past three years the federal government has dropped over 5 trillion dollars on the economy from a helicopter.
Why not take advantage of a loophole when money can and is being created out of thin air?
Deleted Comment
The fairest solution is to scrap CGT and associated capital loss write-offs.
This allows the middle class to thrive by investing in productive enterprises and not getting taxed yet again to do so.
It's the worst kind of tax that punishes success by stealing your after-tax money.
As for your appeal to nation, the US will waste your money on slaughtering Afghanistani children with bombs and handing out cash to serial fraudsters (look up how many people on Social Security are actually real). Most tax money is wasted by government.
Calling out other parasites, don't forget you also are one.
The same money isn't taxed again. Only the gains on top of that.
Some sort of tax on wealth or the proceeds of that wealth is necessary, otherwise you end up with a society where only the middle class pays tax while the people who benefit the most from society, the rich, live tax-free. It's either this or a simple wealth tax.
The very fact that some of these places exist for a long time; means that it's not worth it to invest in them even with the tax breaks.
Not sure that’s correct. https://thehill.com/policy/finance/599753-study-57-percent-o...
Deleted Comment
If I had billions of dollars I would always strive to legally pay as least taxes as possible and use the funds to contribute back the country in much more efficient ways, including investing in people who are provably getting shit done.
Here's the latest of a constant firehose of misuse of funds I've seen. The gist is that a Stanford professor is basically leeching $40K of tax money at a $5000/hr rate for "consulting" about social justice and equity in schools. I'd rather give that $40K directly toward educational supplies for underprivileged students, or to a hundred tutors and therapists at $50/hr, or something else.
https://nypost.com/2022/04/08/stanford-prof-calls-cops-on-be...
How does that make your case?
I'm on the point of panic about taxes right now and still trying to sort out my expenses over the last 2 years which do include about $500k in investment in one of the poorest areas in the country. My location just happens to be gerrymandered out of the local opportunity zone though.