CGA Law News & Blog

Opportunity Zones: Investment with Tax Savings

access_time Posted on: April 3rd, 2019

A Brand New Investment and Tax Savings Vehicle

Article by: Frank H. Countess

CGA Law Firm Attorney; Frank Countess

On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) created Qualified Opportunity Zones. There are numerous provisions contained in the TCJA that were discussed and analyzed thoroughly by the news media outlets, such as cuts to the Federal tax rates for corporations and reductions to the Federal personal income tax rates amongst others. One of the provisions contained in the TCJA that failed to attract any attention whatsoever was the provision related to establishing Qualified Opportunity Zones. The Opportunity Zone concept was conceived to spur economic development in low income population census tracts. These tracts would be nominated by governors and their respective States and certified by the Federal Treasury in exchange for significant U.S. Federal Tax benefits. Investments made by individuals in these special Opportunity Zones would be allowed to defer, reduce and in some instances eliminate Federal Taxes on capital gains. The Governor of Pennsylvania was given the opportunity to designate up to 25% of the poorest census tracts in Pennsylvania as Opportunity Zone tracts. There were nearly 1,200 eligible census tracts in the Commonwealth of Pennsylvania and the Governor designated 300 of these based on economic data, recommendations from local partners and the likelihood of private sector investment in those tracts. One hundred fifty one of the 300 tracts selected are either in Philadelphia or Allegheny Counties. As a result, that left 149 census tracts to be designated in the remaining 65 counties in the Commonwealth. York County received five census tract designations, all of which are within the City of York. Lancaster County and Dauphin County each received six census tract designations. Adams County received none, while Cumberland County received one and Lebanon County received two.

While Opportunity Zones are a brand new investment and tax savings vehicle, the consensus of the experts is that clusters of designated Opportunity Zone census tracts with access to advantages in labor markets, technology and logistics, will have the best chances at attracting the greatest amounts of capital investment and in turn will enjoy the greatest economic revitalization. The original champions proposing the Opportunity Zone concept were certainly a strange set of bed fellows. The genesis of the concept came from Sean Parker, none other than “Napster” himself. He may not have made a whole lot of money on downloading and sharing music files in his early days; however, as the first President of Facebook, he became a multibillionaire as a result of the initial public stock offering. As a result he now had massive, yet to be realized capital gains. After a trip to Tanzania, Mr. Parker had an epiphany of sorts that he felt could create systematic change. He famously stated “This isn’t about the redistribution of other people’s wealth… it’s the redistribution of their time, attention and interest.” One of his earliest legislative supporters of this concept was Democratic Senator Cory Booker of New Jersey, who refers to Opportunity Zones as “Domestic Emerging Markets.” Booker, who cosponsored the Senate Bill, along with Republican Senator Tim Scott of South Carolina, stated “If we can get the trillions of dollars of capital off the sidelines and get the best investment minds coming into our communities… we can end up creating jobs and opportunity.”

The legislation permits certain tax savings on capital gains realized on or before December 31, 2026. The Treasury Department issued highly anticipated guidelines for the implementation of the program on October 19, 2018. They clarified several issues and comments raised by investment and tax experts. Further, the Treasury Department indicated that they will be issuing additional proposed regulations soon to address remaining open issues associated with the Opportunity Zone Program. It appears the Federal Government is fast-tracking the implementation of the Opportunity Zone investment and tax saving regulations.

So, what does all of this mean for York, Pennsylvania? It seems to be the consensus of the newly minted experts regarding Opportunity Zones that the regions with concentrations and clusters of Opportunity Zones are likely to be the most successful in attracting investment capital and revitalization to their areas. In York, we are ideally situated as our five Opportunity Zones are clustered in close proximity to each other. Further, they all benefit from the advantages of one of the most highly skilled manufacturing labor forces in the United States coupled with technological and logistical advantages our region enjoys over most other parts of the country. The Federal Opportunity Zone Program is definitely one worth watching over the next decade as the very program itself seems to be an ideal pairing with the economic revitalization already underway in the York Area.

Frank H. Countess is an attorney, shareholder and
Chair of the Real Estate Department at CGA Law Firm