Qualified Opportunity Zones–Benefits of Using C-Corporation Structure
As investor interest in qualified opportunity zones (“QOZ”) grows, both qualified opportunity funds (“QOFs”) and investors should be aware of the benefits of organizing QOFs as C-Corporations. C-Corporation QOFs may take advantage of the reduced corporate income tax rate of 21 percent and the benefits under Section 1202 of the Internal Revenue Code (the “Code”).
Section 1202 allows non-corporate taxpayers, to exclude from gross income 100 percent of eligible gain from sale of so-called “qualified small business stock” (“QSBS”) if certain requirements are met. The gain to be excluded on sale of QSBS must not exceed the greater of: (a) $10,000,000, or (b) 10 times the aggregate adjusted basis of QSBS. Since the limitation applies to each taxpayer/investor, the aggregate amount of gain excluded from gross income of all the shareholders may be substantial. Additional requirements for QSBS gain exclusion include: (i) the gross assets of the corporation must not exceed $50,000,000, (ii) at least 80 percent (by value) of the corporation’s assets must have generally been used in the active conduct of qualified trade or business while the taxpayer held such QSBS, (iii) the QSBS must be issued by a qualified small business at original issue (directly or through an underwriter) and (iv) the taxpayer must hold the stock for more than five years.
Investors in QOF stock that also qualifies as QSBS may have the following benefits:
Based on the foregoing, developers and investors should consider the benefits of organizing QOFs as C-corporations. QOFs organized as C-Corporations provide attractive investment opportunities for cash investors and investors with deferred gains, flexibility with early exits if so desired, significant tax savings on early exits and possibly easier exits on sale of QSBS stock, which could still offer various QOF benefits to potential buyers. As with any investment, investors should consult their tax advisors prior to investing in a QOF.
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