Authored by Mallory Gorman, Colin Walsh and Michael Wronsky The Department of Treasury recently released finalized opportunity zone (OZ) regulations, combining and revising two sets of proposed rules issued in October 2018 and May 2019 into a single regulatory package. The final regulations are comprehensive and generally taxpayer-favorable. For additional background and details regarding OZ and the proposed regulations, please see our Tax Alerts from April and June of 2019. The most significant takeaways from the final regulations are: Additional types of gains excluded for investors with a 10-year holding period: The statute and proposed regulations allow taxpayers holding a qualified opportunity fund (QOF) interest for a requisite 10-year period to exclude any gain (1) from the disposition of the QOF interest itself, and (2) any capital gains arising from the QOF selling its qualified opportunity zone (QOZ) property, if the QOF is organized as a partnership or s corporation.  The difficulty presented by these options was that the only way to fully benefit from the income exclusion provision was to dispose of the taxpayer’s entire equity interest in the QOF. If a QOF disposed of its investment in a qualified opportunity zone business (QOZB), the taxpayer could elect only to exclude capital gain flowing through the QOF as a result of the transaction. However, any ordinary income or depreciation recapture would be subject to taxation.  Moreover, if the QOZB disposed of its assets, including qualified opportunity zone business property (QOZBP), the transaction would be fully taxable. This caused frustration among investors, project sponsors and practitioners alike, as the only sure-fire way to realize the full benefit of excluding any gain on exit was to set up multiple single-asset or single-project funds, creating organizational and compliance-related inefficiencies.  The final regulations address these issues by allowing eligible investors to exclude: Gains on sales of any property, with the exception of inventory, by the QOF and by any subsidiary QOZB, and Any ordinary income associated with such property sales. Apart from the obvious benefit of allowing investors to exclude nearly all gains after achieving a 10-year hold, this provides critical flexibility in structuring QOZ deals. Specifically, a single QOF can now invest in multiple projects, falling in line with how a typical investment portfolio operates. In other words, the final regulations facilitate the creation of multi-asset QOFs.  Investment of gross section 1231 gains – sales of property used in a trade or business: As covered in detail in our previous Tax Alert, gains from singular sales of property used in a trade or business are eligible for investment in a QOF, with the 180-day window beginning on the date of sale. These gains no longer have to be reduced by losses on trade or business property sales the taxpayer incurred in the previous five tax years.  Longer investment window for eligible gains reported on Schedule K-1: Under the proposed rules, a taxpayer who is allocated eligible gains on a Schedule K-1 (K-1) generally has 180 days from the end of the K-1-issuing entity’s tax year to invest. Alternatively, they can elect to have 180 days from the date of the transaction that triggered the reported gain, if they were privy to such information. Acknowledging the significant time lapse that can occur between the end of an entity’s tax year and when an owner receives their corresponding K-1, Treasury now allows investors a third elective option: to have their 180-day window begin on the due date of the entity’s tax return (without extensions).  Substantial improvement: To qualify as QOZBP, the property must either be originally used in a QOZ or be substantially improved during a 30-month period after purchase. The rules associated with the latter requirement are updated as follows: Aggregation permitted. Under the proposed regulations, each item of non-original use property must be substantially improved to qualify as QOZBP; aggregating assets was not permitted. The final rules allow for aggregation to meet this requirement, if the subsequently purchased original use assets being aggregated: 
– Are used in the same trade or business in the QOZ (or a contiguous QOZ) that the asset being improved is used, and
– Improve the functionality of the asset being improved in the same QOZ or a contiguous QOZ. 

The final regulations provide an example in which a QOF that purchases a non-original use hotel is able to count the purchase of original use property including mattresses, linens and furniture in measuring whether the hotel has been substantially improved. Conversely, if the QOF purchased similar assets to refresh an apartment building it owns and operates as a separate trade or business, these assets would not count toward the substantial improvement of the hotel, even if the buildings are located in the same QOZ. 

Further, buildings located on the same parcel of land and described in the same deed can be aggregated. Buildings located on contiguous parcels of land and described in separate deeds can also be aggregated if they:
– Are operated exclusively by the QOF or QOZB, 
– Share facilities or significant centralized business elements (i.e., personnel, accounting, legal, manufacturing, etc.), and
– Are operated in coordination with, or reliance upon one or more of the QOF’s or QOZB’s trades or businesses (i.e., supply chain interdependencies, mixed-use facilities, etc.).  Satisfaction of asset tests. Property in the process of being substantially improved is considered QOZBP, therefore satisfying a QOF’s or QOZB’s asset test. Improvements to nonqualifying property are not QOZBP. One of the few taxpayer-unfriendly clarifications in the final regulations provides that improvements made to nonqualifying property (i.e., contributed property, property purchased prior to 2018 or from a related party) are not considered QOZBP. To illustrate, if a QOF received a contribution of raw land in exchange for an equity interest and subsequently constructed a parking lot and fencing on the land, neither improvement would qualify as QOZBP. Treasury noted that allowing such property to count could require extensive record-keeping requirements and place an administrative burden on taxpayers and the IRS that would far outweigh any associated benefits.  Selling property to a QOF does not create gain eligible for investment in the same QOF: This is another situation where Treasury became more restrictive. The seller of an asset to a QOF or QOZB cannot reinvest gain from that asset sale for a qualifying investment in the QOF, even if that ownership interest is 20% or less to avoid the related-party rules. In response to requests for clarification whether this was a viable strategy, Treasury notes that general federal income tax principles would recast this transaction as a property contribution, given the cash, as a matter of substance, never truly changes hands. As a result, from the investor’s standpoint, there is no sale and, therefore, no eligible gain to invest. Further, with respect to the QOF, there is no purchase and, in turn, the property does not qualify as QOZP.  Installment proceeds eligible for investment in year of receipt: The final regulations clarify that capital gains recognized on current payments received pursuant to an installment sale agreement are eligible to be invested in a QOF, even if the sale was executed prior to 2018. With respect to the 180-day window to invest such payments, taxpayers can choose between having it begin on the date a payment is received during the tax year or the last day of the tax year in which a payment is received. Note that taxpayers receiving multiple installment sale payments in a single tax year would have multiple 180-day periods, should they choose the former option. Lastly, to clarify, taxpayers interested in investing the entire capital gain arising from the sale within 180 days of the transaction date would need to eschew the installment method to be eligible to do so. Reduced timeline for vacancy rule: The proposed regulations provide that property previously used within a QOZ will satisfy the original use requirement if it had been vacant for five years prior to purchase. The final rules shorten this timeline, allowing the following to be considered original use property: Property vacant for one year prior to the date the location received its QOZ designation,  Property vacant for three years after the QOZ designation and before purchase.  A 62-month working capital safe harbor for startup businesses: Working capital a QOZB uses within 31 months pursuant to a written plan to construct, acquire or substantially improve tangible property, or to develop a trade or business within a QOZ will not cause the QOZB to fail an asset test. The finalized rules provide a new safe harbor for startup businesses, providing that during a maximum 62-month period in which a QOZB is developing a trade or business: Working capital it holds will not cause it to fail an asset test, Gross income the trade or business earns will be counted toward the satisfaction of the 50% of gross income test, Tangible property it purchases, leases or improves pursuant to the written plan will count as QOZB, and  Intangible property it purchases or licenses pursuant to the written plan will count toward the satisfaction of the 40% intangible property use test.  The 25% aggregate S corporation ownership change inclusion event repealed: In our 2019 year-end tax letter, we cautioned against investing eligible gains realized by an S corporation into a QOF. This was due to the proposed regulations listing changes in excess of 25% in the ownership of the S corporation as an inclusion event, which would terminate the benefits associated with the QOF interest. The final regulations remove this rule. What’s next? These many taxpayer-friendly changes and clarifications will provide investors, QOFs and QOZBs considerable added flexibility to take advantage of the OZ program’s benefits and comply with its governing provisions. However, areas of uncertainty remain. Specifically, while the final regulations sought to provide guidance regarding when a triple net lease sufficiently rises to the level of a trade or business for QOZ purposes, the examples provided lack detail and clarity. Additionally, the administration of penalties for a QOF’s asset test failure and the implications to a QOF that repeatedly fails its asset tests are reserved for future guidance. At this time, it is unclear whether additional proposed regulations will cover these topics in greater detail, or if they will be addressed via subregulatory guidance.  We encourage you to reach out to your Baker Tilly advisor to discuss whether you may benefit from the OZ program. 
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Take a deeper dive into the final opportunity zone regulations that the Treasury Department released at the end of 2019.

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Final opportunity zone regulations: key takeaways

Baker Tilly and NACD: 2020 Governance Outlook Projections on Emerging Board Matters Baker Tilly and the National Association of Corporate Directors  (NACD), the authority on boardroom practices representing more than  20,000 board members, released the 2020 Governance Outlook: Projections on Emerging Board Matters, featuring Baker Tilly’s 2020 Strategic Risks for Boards. The outlook serves as an annual roadmap to guide corporate directors and senior executives as they tackle business and governance risks and issues throughout 2020. Baker Tilly’s 2020 Strategic Risks for Boards focuses on critical disruptive forces and risks affecting boards and organizations including: Mergers & acquisitions International trade International and domestic tax Privacy Boards must tackle an increasingly complex set of disruptive risks–both domestically and internationally–which are reshaping the world in which they do business. Effective board directors provide proactive guidance and demonstrate meaningful oversight in the face of an accelerated pace of change, innovation and disruption within and outside of their organization. The report also highlights NACD survey findings on the top board priorities for 2020 and highlights issues related to preparing for the next recession, regulatory changes, legal risks, board composition, the digital frontier and other topics. ​Download the report.
Baker Tilly and NACD roundtable blog article and video: Is your board keeping up with evolving expectations around privacy NACD and Baker Tilly hosted a board-level discussion on The Power of Privacy: The Board’s Role in Privacy Oversight. The discussion involved  understanding the current privacy regulatory environment and emerging  risks that can affect oversight. Boards hold a significant role in  ensuring management takes a risk-based approach to protect, respond to  and address a widening list of data privacy regulations and  requirements. The blog below provides a summary of the discussion and  highlights the importance of using a comprehensive data privacy program  to assist the board in privacy oversight. Read the article. Watch the roundtable highlight video. 
Baker Tilly – NACD BoardTalk Blog Article: Anticipating Disruptive Innovation and Digital Transformation Authored by Waqqas Mahmood To stay competitive and relevant in a rapidly changing business  landscape, organizations in every industry must navigate an increasingly  disruptive, technology-enabled environment. Companies that do not  address and embrace new and emerging technologies will be less  competitive or may even face obsolescence. Advanced digital technologies  bring with them both opportunities and challenges for boards. Boards  must become knowledgeable about these digital disruption trends in order  to be able to conduct meaningful oversight that management can use  successfully as the company embraces new technologies. Read the article.
Baker Tilly – NACD BoardTalk blog article To Stay Competitive, Leave No Risk Behind Authored by Raina Rose Tagle In order to stay ahead of enterprise risks, directors should ask  management questions that illuminate gaps in strategy. Boards can enable  organizations to gain an edge through a sometimes overlooked area: the  intersection of strategy and enterprise risk management (ERM). The  integration of ERM and strategy enables enterprise risks to be  identified in the context of your strategic plan. It also allows  strategic execution to consider the potential impacts of enterprise  risks. Read the article. 
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The Fed Talks Podcast is a series of audio episodes featuring current issues in government contracting, offering thoughtful, bite-sized insights with rotating guests from inside and outside Baker Tilly. This week: Policies and Procedures On this episode of Fed Talks, we discuss the need and approach to documenting policies and procedures for government contractors with Baker Tilly team members Joseph McCaffrey and John Hindman.  Questions addressed include:  How many policies does a government contractor need?   How do business systems influence the organization of policy?  How does a contractor choose areas to cover in their policies and procedures? Connect with us to hear more from our GCAS team 
About the Host Derek Boyd, CPA, Senior Manager
Derek consults with numerous government contractors and designing and building compliant business systems in accordance with FAR, CAS, and DFARS requirements and industry best practices. Derek has supported contractors in both a consultative and internal capacity for over a dozen years, working directly with contractors and their government stakeholders. 
About the Guests Joseph McCaffrey, Partner Joseph McCaffrey has extensive consulting experience working with government contractors and not-for-profit organizations. Joseph has advised clients in the aerospace, hospitality, healthcare, construction, security services, technology and professional services industries on a wide range of business issues and regulatory compliance matters. John Hindman, Director John has extensive experience assisting government contractors with complex regulatory compliance matters, internal control assessments, business process analyses, incurred cost proposal preparation, and Cost Accounting Standards (CAS) compliance. 
About the Producer Andrew Graziano, Senior Consultant 
Andrew has been with Baker Tilly for over 2 years and has spent that time working with government contractors on a wide variety of compliance matters.  In particular, Andrew has experience with incurred cost proposals, indirect rate modeling, price proposal preparation, cost impact analysis, and commercial sales practice disclosures. In his spare time, he produces and edits this Fed Talks podcast.
  
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2019 has been a transition year as taxpayers filed their first returns under the Tax Cuts and Jobs Act (TCJA). Not only have taxpayers become acquainted with the legislation, the IRS and Treasury continue to issue regulatory guidance interpreting the TCJA. While we are nearly two years in since its passage, substantial guidance in certain areas has yet to be issued. Compliance with the TCJA is not the only issue affecting taxpayers (both businesses and individuals): After 10 years of economic growth, possible signs of recession are on the horizon. A tightening labor market creates hiring challenges for employers. Uncertainty in the ever-changing world of tariffs and trade policy makes planning difficult for many businesses, especially manufacturers and others operating internationally. In addition, entities facing downturns can no longer carry back net operating losses (NOLs) to obtain much-needed cash (via a tax refund) since the TCJA has repealed NOL carrybacks for most taxpayers. Consequently, managing cash and minimizing current taxes is even more critical if you anticipate a downturn in the economy. We expect the remainder of 2019 and 2020 to be a dynamically changing time as additional TCJA guidance is issued and international tensions continue to impact trade and tariffs. We remind you that tax planning should be addressed throughout the year as an integral part of overall financial health. As always, we encourage you to contact your Baker Tilly advisor to discuss how these issues affect your tax position. Download the 2019 year-end tax planning letter > Visit the sections below for more information about the most pressing year-end tax issues: Potential impact of rising tariffs Developing rules under TCJA and technical corrections Tax reform – full expensing of assets Revenue recognition rules finally arrive Opportunity zone considerations Employee benefits and executive compensation update Affordable Care Act update Emerging technologies and the R&D credit International taxation State and local tax update
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- Focus on state income, franchise and business entity taxes We will continue to keep you informed of the latest developments by sending updates to assist you with planning throughout the remainder of the year. See our 2019 Tax Planning Guide for additional ways to help you reduce your taxable income by taking advantage of every tax break to which you are entitled. -- The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Baker Tilly’s annual year-end tax planning letter delves into guidance and regulations issued over the last year that may complicate how you file your taxes next year. Our professionals also look at international, federal, state-and-local and compensation tax issues among other areas.

Final opportunity zone regulations: key takeaways

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Fed Talks: Policies and Procedures

2019 year-end tax letter

Final opportunity zone regulations: key takeaways

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