While the IRS works on opportunity zone guidance, Bob Ibanez, senior public policy manager at Novogradac & Company, has suggested in a recent article that the Treasury department use the lessons they have learned from the New Markets Tax Credit (NMTC) program.
There are several similarities between the opportunity zone benefit and the NMTC, including (but not limited to):
- The census tract criteria for designation as an opportunity zone mirrors that of the low-income tract criteria for the NMTC program.
- The list of “sin” businesses that are prohibited are similar between the two programs.
- The 180-day limit for deployment of capital gains into an opportunity fund (vs. 12 months for NMTC).
- Both are tax-driven incentives under the Internal Revenue Code.
According to Novogradac & Company:
Despite these similarities, there is one particularly noticeable distinction: the means by which private investment in low-income communities will be incentivized. In the case of OZ investments, capital will flow from an untapped reservoir of unrealized capital gains estimated to be approximately $6 trillion, according to the Economic Innovation Group. In stark contrast, the NMTC is subject to congressional allocations of tax credit authority that currently extends through 2019 at $3.5 billion annually. Furthermore, allocations of NMTCs are awarded through a very competitive annual award process, with typically only one in three applications receiving awards.
That $3.5 billion annually for the NMTC program may end up paling in comparison to the amount of capital that the opportunity zones program may drive into the designated opportunity zone communities. So it is essential that the Treasury department gets this right.
Ibanez suggests that it would be beneficial if the Treasury department guidance were to accomplish several tasks, including:
- Ensure investments into small businesses are on par with real estate development.
- Interim gains (during the initial 10-year period) reinvested into opportunity zones should receive favorable tax treatment, which would encourage diversification between real estate and operating business investments.
- Extend the deployment time from 180 days to 12 months.