Structuring Investment Funds for Qualified Opportunity Zones: Maximizing Tax Benefits and Preserving Flexibility

Description

The tax reform law created a new capital gains deferral and exemption for taxpayers who make long-term investments in qualified opportunity zones ("QOZs"). The centerpiece of the legislation is a new type of investment vehicle called a qualified opportunity fund (a "QOF"). Fund counsel must have a firm grasp of the structural nuances that can significantly affect a QOF’s operations and tax liability.

A QOF must decide whether to invest in an QOZ business or property directly or whether to hold its QOZ business through a subsidiary.

Any business that aspires to either grow outside an opportunity zone or locate facilities (offices, factories or warehouses) outside the zone will need to adopt a flexible entity structure. Business expansion may have to be facilitated through the use of sister companies that are owned outside a QOF structure or through independent service providers.

Exiting a QOF investment requires particularly careful planning. The QOZ tax exemption is only available if an investor sells its interest in the QOF. Thus, for a QOF that is organized as a partnership (which is likely to describe most QOFs), the exemption does not apply when the QOF sells a QOF subsidiary or any other assets it owns, or when the QOF or a subsidiary sells its assets.

Listen as our authoritative panel discusses these and other structural concerns with QOFs. The panel discussion will include how to allow for flexibility in operations, investment, and exit strategy while preserving the tax benefits intended under this new tax exemption.