By Merrill Matthews
The country abounds in economically distressed areas even in times like these when the economy is strong and unemployment is low. The challenge to turning these areas around and especially the inner-cities has always been to find a way to attract businesses and investment.
Businesses dont want to locate to these areas if people dont have money to spend and people dont have money to spend if businesses dont locate there to hire them. Fortunately Senator Tim Scott (R-SC) pushed through a poverty-fighting solution that could also be a big win for investors.
The Investing in Opportunities Act (IIOA) allows businesses and investors to defer recently incurred capital gains taxes until 2027if they invest that tax obligation in economically distressed areas. And any profit they make from those tax-deferred investments is tax free.
Say an investor realizes a capital gain of $500000 and owes federal capital gains taxes of 23.8 percent or $119000. Instead of giving that $119000 to the feds the IIOA allows the investor to place it in a Qualified Opportunity Fund (QOF) which would invest it in a Qualified Opportunity Zone (QOZ). Doing so allows the investor to defer those capital gains taxes until 2027.
Think of the QOF as something like a Roth IRA in the sense that the investor controls the money and determines how to invest and the gains are tax freeas long as its invested in a QOZ for 10 years. For example investors might decide to open a business or partner with an entrepreneur in the QOZ or buy stock in a business thats already there.
When investors sell their stake the profits are 100 percent federal tax-free as long as the investment was held for at least 10 years.
But even if the sale breaks even or results in a loss investors dont escape that original capital gains tax they just defer it to 2027 or the time of the sale whichever comes first.
The IIOA creates tremendous possibilities for struggling communities: the creation of new or the expansion of existing businesses new capital inflows into undercapitalized areas and an economically attractive opportunity for entrepreneurs both inside and outside the QOZs to invest.
The IIOA could be the rocket fuel that distressed areas need in order to create jobs and spark positive economic growth. Over time it will help increase the tax base and create new revenue streams that could lead to community success stories across the country. And its not a dream: its the law.
Todays PolicyByte was written by Dr. Merrill Matthews resident scholar with the Institute for Policy Innovation
