As the world deals with the COVID-19 health crisis, federal income tax incentives for businesses will be necessary for the economic recovery efforts. One of the possible economic recovery tools is the Opportunity Zone Incentive. In fact, the OZ Incentive could be a critical financing tool for operating businesses with respect to these economic recovery efforts.

The OZ Incentive is designed to encourage private capital investment in real estate projects and operating businesses located in certain populations census tracts in need of private capital investment, called Qualified Opportunity Zones (OZs). There are approximately 8,766 OZs across all 50 states, 6 territories, and the District of Columbia. This represents about 11% of all population census tracts. According to Economic Innovation Group, OZs account for more than 25% of the nation’s food deserts (i.e. low-income population census tracts without a full-service grocery store within a 1 mile radius in urban areas, and within a 10 mile radius in rural areas).

The OZ Incentive had significant momentum at the time that this crisis started. Private capital was being raised in impressive amounts by Qualified Opportunity Funds (QOFs). Additionally, Treasury and the Internal Revenue Service were commended for their taxpayer-friendly approach to the recent release of the OZ Incentive Final Regulations. Additionally, many QOFs already deployed significant capital into projects throughout the country.

Many of the OZs have already experienced or will be experiencing significant job losses as a result of the COVID-19 crisis. A large proportion of the transactions that have already been undertaken with the OZ Incentive involve real estate. However, the Final Regulations provide critical guidance to enable the incentive to attract long-term private equity capital for operating businesses. Prior to the crisis, QOFs were considering using this incentive to invest in a number of operating businesses as a result of the issuance of the Final Regulations.

Many of the relief incentives for small businesses appear to involve low interest loans. The OZ Incentive should be seen as a complementary incentive by raising private equity capital for these businesses.

The following are five possible changes that can be made to improve the efficiency of the OZ incentive to make it more attractive to investors, projects, and businesses during this crisis. Note that some of these suggestions will take congressional action.


In order to elect to defer some or all of a taxpayer’s eligible gains resulting from the sale or exchange of property with an unrelated person for federal income tax purposes, a taxpayer must invest in a QOF and acquire a qualifying investment in the QOF, during the 180-day period beginning on the date of such sale or exchange.

The Final Regulations provide flexibility on the date that the 180-day investment period commences for an equity holder of a pass-through entity when the sale or exchange is generated by such pass-through entity. This flexibility involves the provision of three different start dates for the 180-day investment period, including a date where the 180-day investment period can start on the date that the federal income tax return is due (without extensions) for the pass-through entity for the taxable year in which the sale or exchange occurs. For many pass-through entities, this date will be March 15 of the following taxable year after the taxable year of the sale or exchange by the pass-through entity.

The problem is that in many cases where the eligible gain occurred early in a taxable year, a blackout period exists later in such taxable year where a taxpayer cannot invest in a QOF until Dec. 31 of such taxable year. Further, when an individual sells an asset for cash consideration, the 180-day investment period for such individual will generally start on the date of the sale or exchange of the asset. This means that individuals that sold stocks in January 2020 generally have a short period to invest in a QOF.

Suggested Change: Provide at least an 18-month window after any sale or exchange generating an eligible gain for a taxpayer to elect the commencement of his or her 180-day investment period. This will simplify the process, provide a taxpayer with more time to choose an investment strategy, and will avoid the issue of a blackout investment period when the sale or exchange is incurred by a pass-through entity.


A QOF is required to hold at least 90% of its assets in Qualified Opportunity Zone Property (OZP). An equity interest in a Qualified Opportunity Zone Business (QOZB) meeting certain requirements can be considered OZP for this purpose. Cash is not considered to be OZP. Generally, a QOF has between six to twelve months, depending upon when the cash was invested in the QOF by a taxpayer, to convert such cash into OZP. Essentially, a QOF has between 6 to 12 months to invest such cash into an OZB.

Suggested Change: Extending the date to convert cash into OZP by at least an additional 6 months for a QOF. A perfect example involves calendar year QOFs that received cash from taxpayers back in December 2019. These QOFs are generally required to invest at least 90% of such cash into an OZB no later than June 30, 2020. As a result of the COVID-19 crisis, this investment timeline is going to be extremely difficult to satisfy for most QOFs. An extension here is needed as a result of this crisis.


Taxpayers with eligible gains that acquire a qualified investment in a QOF will be subject to income no later than Dec. 31, 2026, on such deferred eligible gain. This means that the income tax rate that will apply to the deferred gain will be the income tax rate for the taxable year in which the amount is included in the taxpayer's income (which is likely to be the income tax rate for the 2026 taxable year.)

With the expected amount of stimulus that will be needed to manage this crisis, it is likely that more revenue is going to be needed to service the federal debt. Accordingly, there is a possibility that income tax rates in 2026 will be higher than they are currently in 2020.

Suggested Change: Keep the income tax rate for the deferred gain at the same income tax rate that would have applied to the taxpayer on such gain had the taxpayer not invested in the QOF, and is subject to income in the taxable year of the sale. This would eliminate the income tax rate risk that taxpayers must consider when availing themselves of the OZ Incentive. Taxpayers will be more inclined to invest in a QOF when the income tax rate that will be applied to the deferred gain is the same income tax rate for the year that that the taxpayer incurred the gain related to acquiring a qualifying investment in the QOF.


The taxpayer’s initial income tax basis on his or her acquired qualifying investment in the QOF is zero. To the extent that the taxpayer holds the qualifying investment for at least five years, the taxpayer’s income tax basis in such qualifying investment in the QOF shall be increased by 10% of the deferred gain. To the extent that the taxpayer holds such qualifying investment for at least 7 years, the taxpayer’s income tax basis in such qualifying investment shall be increased by an additional 5% of the deferred gain.

It should be noted that taxpayers who acquire qualifying investments in a QOF, after Dec. 31, 2019, will not achieve the 7 year holding period, on or before Dec. 31, 2026, and therefore such taxpayers will not obtain the maximum increase in tax basis in their qualifying investments equal to 15% of their deferred gain on or prior to the date that the deferred gain is included in income. Suggested Change: Reduce