The Zone Of Opportunity For Your Startup
- Invest NW CO
- Dec 14, 2020
- 2 min read
14 December 2020
by Louis Lehot
L2 Counsel
Many startups looking for venture capital could make their business more attractive by creating it within or moving it to a designated "Opportunity Zone."
Today, opportunity zones around the United States have the potential to unleash a whole new class of tax-motivated investors to create or move successful high-tech companies to lower-income communities. Opportunity zones enable job creation and strategic investment in impoverished communities.
In 2017, Congress authorized a new federal Opportunity Zone program to encourage investment in America's most economically challenged areas. The program was designed to provide tax breaks for investors, but emerging companies can now get involved. Today, more than 8,700 Opportunity Zones spread across the U.S qualify as low-income communities under the tax code. So, the program can ultimately recycle previously unattainable sources of capital into lower-income areas of the country.
According to the IRS, an opportunity zone is "an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment." In other words, investors in startups based in opportunity zones make a temporary deferral of accumulated capital profits – a tax benefit, which can eliminate capital gains. After five years, 10% of your basis is tax-deferred; after seven years, an additional 5% of the basis becomes tax-deferred and; after ten years, 100% of reinvested capital gains are permanently forgiven.
Benefits are limited to investments of capital gains in a "Qualified Fund," or an investment vehicle with at least 90% of its assets invested in qualified opportunity zone property. Investors who purchase an interest in a Qualified Fund with means other than capital gains or who receive an interest in a Qualified Fund by performing services for the Qualified Fund will not be entitled to these tax benefits.
Qualified Property is property located in an Opportunity Zone or an equity interest in a U.S. company engaged in a qualified opportunity zone business (a "Qualified Business"). To be engaged in a Qualified Business, at least 70% of a company's property must be used in an Opportunity Zone. In comparison, 40% of a company's intangible property must be used in the active conduct of a business in an Opportunity Zone. Also, 50% of a company's gross income must come from the active conduct of a business in the Opportunity Zone.
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