Opportunity zones—those specially created districts that offer tax breaks to investors—provide some attractive benefits to consumer businesses.
The U.S. Treasury Department in April clarified many of the outstanding questions related to OZs, which were created under the 2017 Tax Cuts and Jobs Act to spur economic growth in lagging geographic areas.
The combination of tax deferral and potential tax avoidance on certain capital gains can be very attractive to any entity that plans to make future investments in real estate. But the investment does not have to be an outright purchase; leases, leasehold improvements, and actual lease payments all qualify, making the new regulations particularly attractive to the consumer ecosystem, especially multi-unit operators of retail and restaurant businesses.
(Photo: Federal Realty Investment Trust)
One common misconception about OZs is that they are located in areas not consistent with the geographic strategies of most consumer companies, especially on the retail end of the supply chain. Surprisingly, there are quite a few very desirable neighborhoods that fall within opportunity zones, as defined by each individual state.
They include Assembly Row (above) in Somerville, Mass., an environment combining retail, restaurants, residential space and more just outside of Boston. The entire city of Portland, Oregon is also designated as a qualified opportunity zone. A map of all of the designated opportunity zones can be found on the IRS website or on the website for the Economic Innovation Group, a bipartisan public policy group.
OZ regulations allow the capital gain to be deferred and potentially reduced by up to 15 percent, but that’s just the start.
In the middle market, many consumer companies are either family owned or closely held by private equity investors. In either case, there is often an opportunity to evaluate investments held outside of the operating entity that may be in position to be liquidated to trigger a capital gain. That capital gain can then be reinvested in opportunity zones as part of the operating entity. OZ regulations allow the capital gain to be deferred and potentially reduced by up to 15 percent, but that’s just the start. Any capital gain on the new investment can avoid taxation altogether if certain requirements are met. Not everyone can benefit from this new tax incentive, but every company in the consumer ecosystem should at least be evaluating whether or not opportunity zones should be part of their future strategy.
Read more about opportunity zone regulations and how they work at RSMUS.com.
