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With 320 designated opportunity zones (OZs) throughout
Ohio,1 the Ohio OZ Credit offers significant tax
benefits for those who invest in low-income communities (and
adjacent communities) to drive economic development in these areas.
Investors facilitate their investment in several ways, including:
(1) investing in OZ-situated real estate development projects
organized by professional real estate development firms, (2)
developing their own real estate project in an OZ, or (3) investing
in a professionally managed qualified opportunity zone
fund.2
The Ohio OZ Credit is an accretive tool that works in tandem
with the federal OZ program as a credit against Ohio personal
income taxes. While not required, the Ohio OZ Credit and federal OZ
incentive are nearly always paired. For example, an Ohio OZ
investor who does not have gains with which to qualify under the
federal OZ program can still qualify to receive the Ohio OZ
Credit.
There have been key legislative changes made to the credit in
2022, and it’s valuable to understand opportunity zones since
they are a prerequisite to obtaining the Ohio OZ Credit.
Opportunity zones program
The Tax Cuts and Jobs Act of 2017 (TCJA) marked the conception
of the OZ program. Following the TCJA’s passage, OZs were
designated, and the program provided several options to incentivize
investment in those designated areas. Incentives and tax advantages
under the federal OZ program include:
- Deferral of otherwise taxable gains invested through Dec. 31,
2026; and - Permanent exclusion of post-acquisition gains for qualifying
investments held for 10 years (e.g., if an initial investment of
$100,000 is later sold for $1,000,000 after a 10-year holding
period, the capital gains on such investment would not be
taxed).3
In general, the federal OZ program requires that an investor
invest an eligible gain into a qualified opportunity fund (QOF)
within a 180-day period of realizing such gain.4 A
qualified opportunity fund (QOF) is an entity structured as a
partnership or corporation for tax purposes that intends to
meet (and meets) the requisite ownership threshold of
“qualified opportunity zone property” within the
required time, among other technical requirements.5 In
practice, an overwhelming majority of experienced OZ investors
utilize a so-called two-tier structure where the QOF makes an
investment into a qualified opportunity zone business (QOZB). This
investment into a QOZB in exchange for equity constitutes the
purchase of qualified opportunity zone property. The use of a QOZB
implicates other technical structural, operational and asset-based
requirements. While this two-tier structure sounds more complex,
practitioners view this structure as the more flexible structure
from a compliance perspective in most circumstances.
Ohio opportunity zone tax credit program
The Ohio Opportunity Zones Tax Credit Program (the Ohio Program)
provides qualifying applicants a tax credit against Ohio income
taxes for 10% of a qualifying investment into an Ohio QOF. This
credit is immediately available to the qualifying investor upon
award and thus can significantly improve an investor’s
after-tax return on investment. There are several requirements to
qualify for the Ohio OZ Credit, including:
- The applicant’s investment must be invested in an Ohio
qualified opportunity fund (Ohio Fund) (i.e., a QOF that holds one
hundred percent of its invested assets in Ohio-situated qualified
opportunity zone property); and - The Ohio Fund must deploy the applicant’s original
investment into Ohio qualified opportunity zone property, which can
consist of interests in an Ohio QOZB.6
The Ohio legislature modified and enhanced the Ohio Program by
the passage of Ohio Substitute Senate Bill 225 (S.B. 225) in June
2022, which law became effective in September 2022. This past
January, the Ohio Department of Development (Development) received
its first round of applications under its revised Ohio Program.
Key Ohio Opportunity Zone Changes made by S.B. 225:
- Increased availability. S.B. 225 increased the
biennium cap on program tax credit awards from $50 million to $75
million for the 2022-23 biennium (July 1, 2021 through June 30,
2023). Thereafter, there will be a $50 million cap for the
2024 fiscal year and a $25 million cap for each fiscal year
thereafter.7 - Increased eligibility. The original Ohio OZ
Credit law required that to be an eligible applicant, the applicant
had to be an Ohio personal income taxpayer. Under S.B. 225,
non-taxpayers can be eligible applicants.8 - Increased transferability. Awardees of Ohio OZ
Credit certificates can transfer, in whole or in part, the amount
of Ohio OZ Credits awarded to any number of transferees by
providing written notice to the Ohio Tax Commissioner.9
Those transferees can similarly transfer their rights to Ohio OZ
Credits, in whole or in part, to others.10 Under the
original Ohio OZ Credit law, the entire certificate was to be
transferred. This enhanced transferability should result
in more efficient and expedient use of the Ohio OZ Credits
awarded and should minimize the amount of credits carried
forward. - More frequent application windows. Under
Ohio’s revised program, instead of a single month-long annual
window each January with respect to prior calendar year
investments, there are now two application windows. The first
window runs from Jan. 10 through Feb. 1. The second window runs
from July 10 through August 1.11 Each new application
window looks back to qualifying Ohio OZ investments in the
immediately preceding investment period. The investment periods are
now: (A) January 1 through June 30, and (B) July 1 through December
31.
Other OZ Tips of Note:
- QOF managers should be especially wary of the implications of
making debt-financed distributions to their investors, especially
in the case of distributions made within two years from the time
when the QOF raised capital.12 The OZ regulations modify
the general disguised sale rules and may cause an OZ
investor’s original contribution that was a qualifying
investment to retroactively be treated as not being made in
exchange for a qualifying investment and trigger disguised sale
treatment. - Many would-be OZ investors mistakenly believe that the law
provides for a 180-day investment period measured only from the
date that the underlying gain or gains were realized. While this is
generally the case, there may be different 180-day periods
available, especially in the event of gains realized by a
partnership.13 For example, if a partnership using a
calendar year as its tax year realized gains in May 2022, the
individual partners may be able to use a 180-day period beginning
on Dec. 31, 2022. - The Department grants Ohio OZ Credits in each application
window on a first come, first served basis. Thus, it is advisable
for qualifying investors to submit an application upon the opening
of the application window.
This article represents a summary only. It does not include all
of the provisions of the applicable statutes, rules, regulations
and guidance, and ignores various fact-specific technicalities and
requirements. It is intended for discussion purposes only and not
intended to provide tax advice. Please consult with your real
estate tax counsel and certified public accountants with
opportunity zone expertise prior to making any opportunity zone
investment.
Footnotes
1. Ohio Department of Development, Ohio Opportunity Zones
Tax Credit Program,
https://development.ohio.gov/business/state-incentives/
ohio-opportunity-zones (last visited Jan. 29, 2023).
2. Note that any investor utilizing an organized
qualified opportunity fund should ensure that only investments in
Ohio qualified opportunity zone property would be made if the
investor desires to be eligible for Ohio OZ Credits. Further, it
should be noted that both the Ohio and federal opportunity zone
programs incentivize not only real estate development projects, but
also investments into operating businesses.
3. I.R.C. §1400Z-2(c). Note that there were
opportunities to obtain a 10 or 15 percent step up in basis on the
investor’s original investment but those provisions have
expired for new opportunity zone investments.
4. See I.R.C. §1400Z-2(a)(1)(A).
5. See, e.g., Internal Revenue Code §1400Z-2(d)(1)
and the underlying Treasury Regulations.
6. In the application process to obtain the Ohio OZ
Credit, Development requires documentation enabling it to trace the
investment to ensure the Ohio Fund in fact received funds and that
funds were in fact deployed by the Ohio Fund into a qualifying
investment.
7. Ohio Rev. Code §122.84(C)(2).
8. See, e.g., Ohio Rev. Code §§122.84(A)(4)
& (B).
9. Ohio Rev. Code §122.84(E)
10. See id.
11. Ohio Rev. Code §122.84(B).
12. See Treas. Reg.
§1.1400Z2(a)-1(c)(6)(iii)(A)(2).
13. See Treas. Reg. §1.1400Z2(a)-1(c)(8)(iii)(A)
& (B).
Originally Published by CPA Voice
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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