Episode 13: The Opportunity Zone Opportunity

This week on Tackling Tax, we’ll explore opportunity zones, which aim to stimulate new investment in economically distressed communities, and how they could benefit you.

Episode Transcript

(00:01):
On thisepisode, we'll look into Opportunity Zones
and how to take advantageof the incentives.
We welcome Michael Hanger, partnerin the Norfolk, Virginia, area
and leader of the Opportunity Zoneservice here at Forvis Mazars.
From your one stop for taxupdates and analysis, I’m Iris.
And I'm Devin.
It's Tuesday, October 28th,and this is Tackling Tax.

(00:40):
Before we get startedwith our much anticipated guest,
we always start our show
with the four stories that we thinkmight be most impactful to you.
So let's jump right in to the FastFour stories of the week.
Congress is digging in for
what's shaping up to be a recordbreaking, full funding shutdown.

(01:01):
We've already passed the 23-day mark ofwhat's currently the second longest
federal government shutdown in U.S.
history,and there's no clear end in sight.
According to Senator John Kennedyfrom Louisiana,
he said, quote, “I think it's going to bethe longest shutdown in history of ever.”
With the current record standing at 34days during the 2018 shutdown,

(01:22):
if Kennedy is correct, that would meanthe shutdown would continue for weeks.
Extending the healthcare creditsis a central demand
for Democrats to reopen the government.
While some Republicans agreethat the credit should be extended,
many don't want to includea permanent extension of the credits,
estimated to cost about 350 billion
over 10 years, to a short-term resolutionto fund the government.

(01:44):
The GOP wants to first fund thegovernment, then negotiate on healthcare.
With open enrollment starting November 1stand Thanksgiving travel looming,
tensions are high for both sidesto come to a resolution.
Speaking of the shutdown,with the October 15th filing
deadline now behindus, many taxpayers are wondering,
how is the ongoing government shutdowngoing to affect their returns?

(02:08):
While the IRS is operatingwith a skeleton crew, with nearly
half of its workforcefurloughed and most of the public
facing services are paused,so that means no phone support,
no walk-in assistance, and delaysfor anything requiring manual review.
So, Devin, I mean, if there's all thesedelays, things are happening at the IRS.
Did they give any additional extensionsfor returns?

(02:30):
I mean, the deadline has come and gone,but was there anything that,
any gracegiven in light of the impact to IRS?
You know, great question, Iris.
Have you ever beenin the middle of a blizzard
and you called your workhoping that you could show up late
and your employer said, no,you better make it to work on time?
It's a bit like that.
Yes, the
IRS is operating at a limited capacity,but taxpayers are still required,

(02:54):
or were still required, to meettheir normal reporting obligations.
So hopefully your 2024 individualtax return was timely filed by 10/15.
Now, if you filed electronically,have no apparent errors with your return
and you opted for direct deposit,which was now required for most,
your return is likelybeing processed as usual

(03:14):
and you shouldn'tsee any significant delays in your refund.
But for paper filers, and those expecting
mailed refunds,they may face significant delays.
Now, the bottom line is that the shutdowndid not change filing deadlines,
but it does slow down the IRS’ abilityto respond, review and refund.
Taxpayers should continue to monitortheir status online and expect

(03:35):
to wait longer times for anything outsidethe automated pipeline.
Tariffs are back in focus,contributing nearly 200 billion
in revenue and helping trimthe deficit by 2% thus far.
Starting November 1st,
new tariffs will apply to imported mediumand heavy-duty vehicles.
Most trucks will face a 25% tariffunless they meet USMCA rules,

(03:58):
and busses will be subject to a 10% rate.
Domestic manufacturersreceive a modest offse,
but the broader implication for supplychains and pricing remains uncertain.
Iris, what's going onwith the Supreme Court hearing?
Yeah, Devin, that's a great question.
And the Supreme Court is scheduledto hear arguments on November 5th
in the case challengingthe constitutionality of President

(04:21):
Trump's imposition of broad tariffsunder IEEPA.
That outcomecould have significant implications
for how this and future administrationscan influence trade.
And the Treasuryand IRS recently rolled out four updates
that I think are worth knowing.
So first, we have revenue ruling 2025-21,and that set official rates for November,

(04:42):
including the section7520 rate for valuing trust and annuities,
and the section 382 ratefor corporate ownership changes.
These numbers matter for estate plannersand corporate tax teams
working to restructure or enter family loans.
So next, we have some proposed regsthat were released that aim to simplify
how we determine if qualified investmententities are considered

(05:03):
domestically controlled under FIRPTAor not.
Third, notice 2025-57 gives auto lendersa grace period
for reporting interest under the new OB3deduction.
Taxpayers can now deduct up to $10,000in interest on qualifying vehicle loans,
but only for carsthat were assembled in the US.

(05:23):
The IRS will not penalize lenders in ‘25if they provide basic interest statements
while systems, you know,catch up with these revised changes.
And lastly,the IRS released a new set of FAQs
addressing the impact of OB3 on the ERC,including refund eligibility,
claim filing, timing,and disallowance of appeals.

(05:43):
Now, as an aside,I know there is growing frustration
and concern about the lack of guidanceon employer requirements for the
no tax on tips and, overtime,reporting in 2025.
Please know that the IRS has receiveda deluge of comments,
and they're actually holding a telephonichearing as I speak at this moment, so
hopefully we will be receivingsome guidance here

(06:06):
very soon that can answer a lot ofthe questions that we have.
On today's
segment of Planning Insights,we're joined by Michael Hanger.
Michael has been with the firm
since 2008 and is a partnerin the Norfolk, Virginia office.
Personally, back in the day,I've been able to work with him

(06:27):
on some of the firm's real estate clients,
but today we are here to talk with himabout his work with Opportunity Zones.
So welcome to Tackling Tax, Michael.
Thank you for having me. It'sgood to be here.
So let's step back for a minuteand talk about
what Opportunity Zonesare just sort of high level.
Can you give us some background?
Absolutely.
So, Opportunity Zonescame into place with the Tax

(06:50):
Cuts and Jobs Act of 2017.
The goal of the program was to stimulate
new investmentin economically distressed communities.
So, similar to the New Markets Tax Credit,there were provisions
that were put in placethat drove new investment into these

(07:13):
economically distressed communities.
And then there were certainreporting requirements, or compliance
requirements, that these investmentshad to maintain through that period.
So, Michael, you talk about economicallydistressed communities.
How are those identified?
Is this like a state-by-state basis?
And how am I, as a taxpayer who could,you know, participate in Opportunity Zone

(07:38):
credits, how would I find one of theseOpportunity Zones?
So, what they did when they initially putthe program in place
is they pushed back to each state,
and the governor of each statewas responsible
for identifying the tracts
that they would nominate, in effect,

(08:00):
for this Opportunity Zone designation.
That took place shortlyafter the implementation of the program,
so back in 2018 is when all of this
was happening, and those designations were
ultimately put in placeby the governors of each state.
So, each state has their ownOpportunity Zones within the state.

(08:24):
And then they were certifiedby the Internal Revenue Service.
The IRS then maintainsa map of all of these designated areas.
Under current law,the designations that were put forth back
in 2018 are still in effect,although it is important to note
that they are going to be lookingat those designations

(08:45):
beginning in 2026, for possibly new maps
being drawn effective January 1st, 2027.
But if anyone is interested in the mapor where they might be able
to find an Opportunity Zone,they can go on to the IRS website
where they will have a map of all of the different zones.

(09:06):
Well, that seems
relatively easy then, you can kind ofjust go online and find them.
So we've identified what they are, kind ofwhy do we care?
You know,most of our listeners are business owners,
CFOs, managers of businesses,that kind of thing.
Like what's the bottom line here?
What incentives are available for them?
Sure.
Well, we'll focus primarily on the taxbenefits to the program.

(09:30):
So there are ultimately three benefitsthat were put in place by this program.
The first was gain deferral.
And I do mean gain deferral.
So it could be a long term gain.
It could be a short term capital gain.
But ultimately it had to be a gain.
We've had a lot of clients or taxpayersthat have called us

(09:53):
and requested informationon investing in an opportunity zone.
They found a great investmentwithin an opportunity zone.
They want to participate,but ultimately they don't have any gains
that they would be able to defer.
Well, unfortunately,they can make that investment,
but they're not going to get thesebenefits.
So, I do think we have to start

(10:14):
with that point that therethere is a gain deferral provision.
But that's the number one benefit.
If you have a gain,
you can defer it for a period of timeafter you make the investment.
The second is a basis adjustmentrelated to your gain deferral.
So, for example,if you defer $100,000 of gain

(10:34):
you could get a 10% basis adjustmenton that or $10,000.
So there's a basis adjustmentas another benefit.
The third benefit is really the onethat is
the focus of this program.
And I think the one that most businessowners are going to be truly interested in
and that is a tax exclusion

(10:56):
on investmentsmade into these opportunity zones,
as long as you meet the 10-yearholding requirement.
The first two are are short termor in some cases fairly small benefits,
that third one—that gain exclusionor the tax exclusion after you've held
that investment for ten years—hasthe opportunity to be truly significant

(11:18):
for business owners.
So, Michael,let me make sure I understand.
It's a little technicaland we have a lot of moving parts.
So we have a gain deferral,long term or short term.
If I have stock, let's say in a startup,I sell it and whether or not I've,
you know, have long term gainor I recently got that stock

(11:38):
and have some short term gain, I couldthen invest this into an Opportunity Zone,
potentially increase my basisin that by 10%
with this 10-year holding period, though,does that mean if I sell or, you know,
maybe if you could give me a little bitof like an illustration or example
of how this actually worksfrom a practical standpoint?

(12:01):
Would I sell my interestin the Opportunity Zone,
or how do I meet this10-year holding requirement?
And does that meanthat none of the gain is taxed?
Sure.
That's a great question,and it can be a little bit confusing.
So I think an example is probablythe perfect way
to talk,to think through this at a high level.
So let's say that you sell the stockand it could be any stock

(12:23):
that you hold individually.
It could be stockthat you help your company,
or it could be something elsethat triggered a capital gain.
And let's saythat you have $1 million of gain
that you would have otherwiserecognized on your tax return.
By making this
investment and the election that you'remaking, you can now defer that million

(12:45):
dollars of gain that you would have otherotherwise recognized and paid tax on.
So now you've deferred the gain.
You've got this money,this million dollars in a new investment.
If you hold that investment for a shortperiod of time, under the old rules,
it was either a five-year holding periodor a seven-year holding period.

(13:07):
You would get a basis adjustmentand that's that 10%
that we were referencing earlier.
So in that case,if you had $1 million gain, then
$100,000 of that deferred gainwould effectively go away.
You're going to get a basis adjustmentof 10%.
So, now all you have to worry aboutis the remaining $900,000 of gain.

(13:29):
Once again, the first provision or thefirst benefit was that this is a deferral.
It is not a permanentdeferral of the gain.
It is a temporary deferral of the gain.
So under the original programthat came out under the Tax Cuts
and Jobs Act, if you made an investmentin an Opportunity Zone,
you had until December 31st,

(13:49):
2026 to defer that gain.
So we have a lot of taxpayers out therewho deferred under this
original program that were going to havea fairly significant tax bill
that they're going to,that will come with the 2026 tax filing.
But you do get that 10% basis adjustment.
So your original investmentwas $1 million.

(14:11):
Now you've got an $100,000basis adjustment.
On December 31st, 2026, you may be
recognizing a $900,000 gain
from your original defer.
At that point, you have now recognizedthe original $900,000 of gain,
but you have $1 million investmentin this new Opportunity Zone fund.

(14:36):
Now, let's say that over the next
however many years, up until you've metthat 10-year holding period requirement,
that investment, the value of thatinvestment goes up to $5 million.
So your original investment was a million,but now it's worth 5 million.
That additional $4 millionis what we're talking about as

(14:57):
being potentially fully excluded from tax.
So that's where that real benefit is.
If you can find an investmentthat you feel like will have
significant appreciationover the next 10 years,
then that's a way to fully excludethat gain
from tax in the long run.
I see, that actually makes a lot of sense.
We see a similar concept with FICAtaxation under the special timing rule

(15:21):
where wages are still subject to FICA,but any appreciation on wages
that were taxed when they vestedwill not be subject to FICA,
so that's actually,there is a lot of benefit there,
then if we're looking at a high-growthopportunity.
One quick question I had,if I did invest it with short-term gain,
will it always retainthat short-term character or is there,

(15:43):
you know, an opportunity for thatshort-term character to become long term?
It would be great if that were the case.
But no, it actually is going to retain itfor that full deferral.
So when you think aboutthe original deferral that took place,
whatever the character was of that gain
when you originally deferred,it will be what you recognize in 2026.
So if it was a short-term gainthat you would have recognized absent

(16:06):
the deferral through this OpportunityZone program, then on December
31st, 2026, you will once againrecognize a short-term gain.
So, this is not a mechanismfor shifting short-term to long-term.
It's only a mechanismfor deferring the overall gain.
But it will retain the character.
But like a huge opportunity.
So, I mean, my next question is,is this just for corps?

(16:30):
Is it for partnerships? Can individualstake it?
Like, does it matter who the taxpayer is,what type of taxpayer this is?
So it can benefit a corporation,a corporation could benefit from this.
An individual could benefit from this.
Flow-through entitiescan benefit from this.
Often in real estatewe have discussions around

(16:54):
another deferral conceptwhich is a 1031 exchange.
High level,that 1031 exchange does allow you to defer
your gain, provided you invest itin suitable replacement property.
The downside to the 1031 provisionsis you're very, it's not very flexible
in terms of how you would ultimately makethat replacement investment.

(17:18):
If a partnership is the entitythat would have the gain, it's ultimately
the partnership that would have to makethat new investment.
The Opportunity Zone rolesreally provide a lot of flexibility.
So you do get, you can have C-corporationsthat could benefit from this provision
by investing proceeds from gains

(17:39):
into the Opportunity Zone program.
It could be individuals, who the exampleused earlier was a sale of stock.
It could be a sale of stock,or it could be a partnership or another
flow-through entity, an S-corporationwhere the partnership,
and this is a very common example for us,maybe the partnership recognizes

(18:00):
a significant gain on a saleand then they can make the decision.
Will it be the partnershipthat will ultimately invest in the
Opportunity Zone and be able to defer gainat the partnership level?
Or do you allow the partnership to pushthat gain through to the individuals
and allow them to make decisions on theirown, based on their own tax situation,

(18:21):
on whether or notthey want to recognize the gain
or defer it through an investmentin an Opportunity Zone.
So there really is a tremendous amountof flexibility with this program.
Is there like a specific vehicle
to participate in these Opportunity Zonesthat you have to invest in that vehicle?
Or is it like a direct investmentfrom a taxpayer into this zone?

(18:43):
It's a great question.
It is a little bit of a complex topicin terms of structuring these.
And there are ways that we canmaximize the benefit and perhaps reduce
some of the compliance burden on taxpayersbased on how it's structured.
But high level,the investment needs to be into

(19:04):
what's referencedas a Qualified Opportunity Fund.
Now, there are different waysto structure that fund.
Most typically,
I would say most typically we're seeingthose as partnership structures.
And then there's ultimately different waysthat the Opportunity
Fund can hold its investment.
So there are ways that we would recommendgenerally

(19:25):
that these investments be structured.
But ultimatelyit is going to be an investment
in a qualified opportunity fund.
Understood.
So you had mentioned that this is one ofthe items that came about under the TCJA,
and I would say a big component of OB3 isit didn't add necessarily

(19:45):
a lot of new thingslike TCJA did across the board,
but it really modified
a lot of existing TCJA provisions,especially those that were about
to sunset, as you had just mentionedwith the 12/31/26 deadline.
So can you talk a little bit about how
the OB3 has impacted Opportunity Zonesand maybe what that opportunity

(20:09):
now represents for those that are stillinterested in working with this credit?
Sure.
And at the end of the day,
I think this iswhy we're having this conversation today.
Because of the short time frame
under the Tax Cuts and Jobs Act,there were a lot of limitations
for potential investors, investorswho would say,

(20:32):
I would love to make an investmentin an Opportunity Zone.
But this is a very big decisionand because of the short
timeframethat I have to make the decision,
I ultimately won't be ableto really benefit from this program.
The biggest change with OB3
is the permanency of the rules.

(20:53):
And to make the rules permanent, they didhave to make some changes to ultimately
how the program is administered,but that is really the key.
And so I think nowbecause it is a permanent provision,
taxpayers are
going to be able to really think throughwhether or not
Opportunity Zone investmentsmake sense to them.

(21:15):
The ability to,the change to the permanency
did require that they movefrom the program they had before,
which was a fixed date compliance periodwhere investments had to be made before
December 31st, 2026, and then the deferralperiod ended on that date
and moved to more of a five-yearrolling period.

(21:38):
But I think overall that's goingto simplify things for a lot of taxpayers.
Some of the other changesthat it implemented, previously
there was a fairly complex holding periodrequirement for the basis adjustment.
Under certain circumstancesthere would be a 10% basis adjustment.
And if you held it for seven years, itwould move up to a 15% basis adjustment.

(22:01):
OB3 simplifiedthat by basically changing to a five-year
deferral periodwith a 10% basis adjustment.
So I think it simplified the provisionin that context.
The other thing that it did is it added
a new Rural Opportunity Zone programand actually increased
the incentives for investingin one of these Rural Opportunity Zones.

(22:24):
Under the original program,we saw that most of the
census tracts
that were designated were in urban areas.
And that's where most of the investmentdollars went.
There was clearly an effort this timearound to shift some of those dollars
to rural investments.

(22:46):
And so, not only did they create this
new Rural Opportunity Zone Fund program,but they increased the incentives
from a 10% basis adjustment to a 30%basis adjustment for those investments.
And then finally, they just addedin some additional reporting requirements,
mainly so Congress would be ableto track the program overall

(23:12):
and the benefitsthat it was helping pass on.
So, a good number of changes.
I think, actually to take you backto the first one with the rolling
timeframe, that one has alwayskind of confused me for some reason.
Can you talk about thatjust a little bit more?
And maybe the impact of what that changespractically?
I think it may be helpful to contrast ita little bit with the old rules,

(23:36):
or the rules are put in placeunder the Tax Cuts and Jobs Act.
So as we've talked about before,to qualify under the Tax Cuts and Jobs
Act, you had to make an investmentduring this period of time,
effective January1st, 2018, through December 31st, 2026.
To be able to be
qualified for that 10% basis adjustment,

(23:58):
you had to hold the investmentfor at least five years.
Well, if the program ends on December31st, 2026,
then that meant that you had to makeyour investment in the Opportunity Zone
by December 31st, 2021,
ultimately, to meet that five-year period.

(24:21):
That became problematicfor a lot of investors
when thinking through it, because it doestake time to make those decisions
to become a little more well-versedon the Opportunity Zone program
and make the decisionthat you want to invest.
So because of the short window of timefrom January 1, 2018
to December 31st, 2021,to get that benefit,

(24:45):
it really did limitsome of the effectiveness of the program.
So instead, what they did in this case,rather than creating
a fixed window of time,they created a five-year rolling.
So previously, regardless of when
you made an investmentin an opportunity zone, whether it was

(25:05):
January 1st, 2018 or middle of the year
in 2023, your deferral period ranthrough December 31st, 2026.
So everyone who invested in the programunder the Tax Cuts and Jobs Act
will recognize the gain from that deferral
on the same date, December 31, 2026.
The five-year rolling effectively allows

(25:28):
a period of timebeginning on the date of the investment.
It allows you to defer that gainfor five years for everyone,
and it startswhen you make that investment.
So ultimately, you are,
every taxpayerwho invests in an Opportunity Zone
is going to have their ownfive-year window.

(25:48):
And the deferral will lastuntil the end of that
five-year period, and that'swhen they'll be recognizing that gain.
It certainly allowsfor a lot of flexibility in terms of
when you make the investmentand the benefits that you're going to get.
It is important to notethat this is effective January
1st, 2027.

(26:09):
So, an investment will have to be madeafter that
period to be eligible for the five-yeardeferral.
Okay.
So that's not a retroactive applicationand it's only prospective.
So we're in this
in-between period right now
where if you were to make an investmentin an Opportunity Zone program today,
your deferral would only go until December31st, 2026.

(26:33):
If you can wait to make that investmentuntil January 1st,
2027,then you'll get a five-year deferral.
Yeah, I'm a little surprised thatthat's how they structured it, but hey,
at least it sounds likewe do have some really meaningful
and substantial benefitswith the new changes,
especially with the Rural Opportunity Zoneprogram.
So, Michael,

(26:55):
do you have any big, like, what are theprimary big takeaways for our listeners?
I think that was one of themthat you just mentioned.
But what are some of the actionable stepsthat they probably should be thinking
about or taking right now?
That's a great question.
I think we can break this down into,a couple of buckets.
One is just a reminder if,for any of the listeners who made an

(27:17):
investment under the original OpportunityZone program that came into place
with the tax Cuts and Jobs Act,we have until December 31st, 2026.
That's when that deferral period ends.
So, I would certainly hopethat most people
are considering the cash flow needsthat would come from

(27:38):
making those tax payments
that would be due April 15th, 2027.
So, I certainly know that a lot of
our clients are considering
that cash obligationthat they will have at that period.
So that is a key one.
And I would make a notethat if you happen to have made

(28:01):
an investment in an Opportunity Zoneand the investment didn't
go as well as planned,
so in other words, you made the
investment in the opportunity,let's say you put $1 million in,
but now, because for whatever reason,that investment is only worth $750,000,
it is important to note that the gainthat is deferred is the lesser

(28:23):
of the original gain deferral or the fairmarket value of the investment.
So if you feel like you've gotan investment that has gone down in value
for whatever reason, then it is worthconsidering that provision
to seeif you can't reduce your tax obligation
based on the December31st, 2026 recognition period.

(28:44):
So that's kind of trying to put a bowa little bit on the original program.
And as that is in kind of the winddown phase at this point,
moving to the new program under OB3,really I think the key takeaways
are the permanency, as mentioned earlier,under the original program,
because of the limited time frame,it really made it difficult

(29:07):
for business ownersto make long-term investment decisions
that workedwell within the Opportunity Zone program.
Now, because of the permanencyof the rules,
I think it gives businessowners an opportunity
to consider
opportunities and investments as partof their overall business strategy.

(29:30):
And I think it also gives time,
and we all know how long some of thesedevelops can take to implement.
And so I think it also givesbusiness owners an opportunity
to work with state and local leadershipto develop projects
that will maximize the benefitsto the economically distressed communities
that ultimately,this program was designed to help.

(29:51):
Well, what a great conversation, Michael.
Thank you so, so much for joining.
I think it's all a little bitclearer to me.
It's a complicated one.
But what a benefitpotentially for the folks listening.
So thanks for joining.
And we hope to hear from youin the future.
Once again, thank you for having me.
And you know, certainly I'm happy to helpanyone who would

(30:14):
want to think through the OpportunityZone program.
Thank you Michael.
And with that, we'll take you to theFocused FORsight of the week.
Each episode will bring you what we calla Focused FORsight of the week,
an article or webinarthat might be of interest to you.

(30:35):
This week's Focused FORsight is an articlewritten by our guest today,
Michael Hanger,and it is titled “Opportunity Zone Changes
and the New 2025 Tax Act.”Take a look for an easy and digestible
quick reference to some of the topicsthat we talked about today.
And that's our show. Thanks for joining.
Remember to subscribe and listen infor the next episode of the podcast.

(30:59):
Until next time.
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Such analysis and conclusionsshould not be deemed
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(31:20):
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