Opportunity Zones: What are they? How do they work? Why do they work?

This OIX blog post regarding Opportunity Zone (OZ) tax incentives is the first in a recurring series intended to provide a variety of information, commentary, and intelligence on how this latest economic development program is functioning. This post will provide a simple overview of OZs, while future posts will dive deeper into how OIX technology solutions and our SaaS platform offer OZ fund managers an effective application to administer fund activities.


Opportunity Zones 101

Thanks to some recently-enacted tax legislation resulting from the 2017 Tax Cuts and Jobs Act (TCJA) taxpayers can defer capital gains liabilities when investing in underserved communities across the US.

These regions are called Opportunity Zones, and the tax incentives that come along with them are designed to boost long-term public-private sector investment in low-income urban and rural communities throughout the country.


The Origin of Opportunity Zones

There are major geographical disparities when it comes to private sector investment in the US. The country has been relying on just a handful of places to generate its growth – with five metro areas cranking out as many newly-formed businesses as the rest of the US put together (between 2010 and 2014).

While a handful of cities are surging, much of the rural and impoverished regions of the country are left behind – which is why the concept of Opportunity Zones came about.


View the Interactive Opportunity Zone Map


The US government crafted a new section of the Tax Code (26 U.S. Code § 1400Z) in the TCJA. This created a new type of economic development program called Opportunity Zone Funds, which offer investors big federal tax advantages if they invest in targeted areas referred to as Opportunity Zones.


What are Opportunity Zones?

An Opportunity Zone (OZ) is a US census tract that has been nominated by its state to be classified as such. The idea is to spur job creation and general economic development in regions that haven’t been able to reap the benefits of the country’s economic recovery.

In order to qualify, a potential OZ must meet the law’s requirements for low incomes or high poverty rates. Opportunity Zones can be found in every state, in five US territories like Puerto Rico, and in Washington DC.

Over 8,700 census tracts, which is about 10% of all census tracts in the country, have scored designations as OZs – and they can range from a few square blocks to massive swaths of land.


Must I relocate in order to take advantage of an Opportunity Zone?

Businesses don’t have to move to an economically distressed area to set up shop, nor do investors have to move to a designated OZ to take advantage of this new tax code. In fact, there is no need to live, work, or run a business in an OZ in order to score the appealing tax incentives.


How do Opportunity Zones benefit investors?

These tax benefits only apply if one invests in a Qualified Opportunity Fund (QOF), which is an investment vehicle created as either a corporation or partnership for investing in eligible property that’s geographically situated in a Qualified Opportunity Zone.

There are two ways that investors can benefit from investing in a QOF:

1. Investors can take previously-earned capital gains (generated elsewhere) and invest them in a QOF to defer paying taxes on those gains. Tax savings depends on how long the QOF investment is held:

– Less than 5 years: No savings. Deferred payment of existing capital gains until the QOF is sold or exchanged

– More than 5 years: 10% exclusion of the deferred gain

– More than 7 years: 15% exclusion of the deferred gains

– More than 10 years: Investor is then eligible for a bump up in the basis of the QOF investment equivalent to its fair market value on the day that the QOF investment is exchanged or sold off (whichever comes first).

2. Investors pay zero capital gains tax on any opportunity-zone investment they hold on to for at least ten years.


Opportunity Zones in Practice

Now, investors can avoid paying capital gains taxes by dedicating themselves to a long-term investment in a community that really needs it. The law is written so that only certain investments can qualify, to ensure that funds flow where they are needed the most.

For example, a real estate fund whose main business involves investments in real estate properties can qualify as a QOF if 90% of the properties in its portfolio are located in an OZ.

This way, the government is making sure that their tax incentives are only given to investment operations that can truly enrich a lagging local economy.


So what’s the bottom line?

Opportunity Zone investments aren’t a sure-fire success when it comes to return on investment (ROI), as many factors come into play. It’s best for investors to carefully strategize their QOF investments, as well as look at how other tax incentives (like local or state tax breaks) can be combined with the benefits of investing in Opportunity Zones.

UPDATE: The OIX Integrates 3,500+ Statutory Tax Credit Programs Into Its Credit and Incentive Software

The integration with CCH’s IntelliConnect And Business Incentives Navigator Product Suite delivers updated information on thousands of statutory programs in a timely manner.

Commerce Clearing House (CCH) is a provider of best-in-class software solutions for tax, accounting and audit workers. The OIX and CCH recently announced the integration of CCH’s IntelliConnect and Business Incentives Navigator Product Suite into The OIX Credits and Incentives (C&I) discovery platform. This new combination will provide The OIX customers with detailed information on available economic development programs at the federal, state and local level. In addition, as the database is maintained by CCH in real-time, customers will receive legislative updates (on both existing and new programs enacted) to help them identify and take full advantage of available C&I programs.

The new product enhancement offers OIX customers the ability to identify available incentives through precise and granular filtering based on contemplated investments. The result is a strategic planning and roadmap tool for optimizing the decision making process and maximizing the profitability of C&I assets, improving your firm’s tax credit management. Danny Bigel, founder of The OIX stated, “The importance of properly managing a C&I portfolio cannot be overstated. Maintaining compliance, regulations, filing requirements and rules and regulation amendments are all essential factors in ensuring the optimal financial impact is achieved and for avoiding problems such as slippage, recapture claw back, or in the worst case forfeiture. Integrating CCH’s “IntelliConnect and Business Incentives Navigator Product Suite” into our tax credit software provides OIX customers with enhanced research capabilities. This is only the latest example of our relentless drive to constantly improve our platform and remain the innovation and value creation leader. ”  

Mr. Bigel added, “In the coming months, our incentive program database will continue to grow as we add expanded international C&I program coverage as well as advanced modules that will compute, compare, calculate and analyze available incentives. Our sole mission at The OIX is to deliver technology that allows our customers to use the full potential of every applicable C&I program to escalate profitability and create game-changing margin expansion, all while advancing good corporate citizenship and helping improve local communities.”

Stay tuned for more!

As a Business Owner, What Should I Know about Business Tax Credits?

How to Best Maximize Economic Benefits

Ensuring that a business achieves long-term growth takes a lot of careful strategizing. This is especially true when it comes to tax planning, where organizations have the opportunity to carve out substantial savings every year – and potentially even generate additional cash flow.

Especially in recent years, there has been a legislative surge in new tax benefits through economic incentive programs geared to stimulate investment and job creation for small, midsize, and even large global companies. This extends from the federal, state and local level here in the US, with identical dynamics on a global level throughout international jurisdictions, and now businesses are faced with a complicated and vast collection of opportunities to save – and even make – money with respect to taxable liabilities. The byproduct of this fiscal policy is known as tax credits.

The problem is that, far too often, organizations’ focus on regular management of traditional tax compliance causes them to miss opportunities – meaning tax credits that don’t get claimed, or worse, companies do not go after credits and incentives that they may be eligible for.

Boot Camp: What is a Business Tax Credit?

Tax credits are generated through government-sponsored incentive programs that are designed to influence businesses (and individuals) to behave in a way that is beneficial to their community, local workforce, or environment.

Credits and incentives should not be confused with tax deductions; the latter enables a reduction to total taxable income base (decreasing what can be taxed by the government), whereas the former provides a dollar-for-dollar reduction in tax liability after calculating the total tax bill. If an organization properly demonstrates that they have fulfilled program requirements and the rules and regulations that govern defined benefits, then a tax credit is issued along with guidelines for redemption.

Properly taking advantage of incentive programs and the tax credits they produce isn’t easy. While it may seem simple on its face, real-world understanding and management of tax incentives is quite an undertaking – no matter the size of the company. Legislative and statutory frameworks dictate how business tax credits can be earned, claimed and monetized, and a considerable amount of expertise is required to navigate these waters.

There are seemingly countless types of tax credits available to businesses, and each of them have their own unique list of preconditions, requirements and qualifications. Not only do companies need to determine which US federal tax incentives are available and how to take advantage of them, there are incentive programs offered by all 50 states. Further, city governments also provide their own tax incentives that are designed to support investment and job creation on a municipal level, endeavor to lure new businesses to relocate and/or encourage expansion of local operations.  This same dynamic exists on a global level as there are tax incentive programs offered by just about every government around the world.

Tax Credit Monetization: What Types of Tax Credits are There?

There are a myriad of available tax incentive programs that support and encourage innovation and investment across just about every industry.  From pure “jobs” programs – including Enterprise Zone, Work Opportunity Tax Credits (WOTC), Research & Development, among so many others, which as policy programs target and stimulate the most innovative industries and quality jobs – tax credits and incentives are the most effective economic development tool that government has at its fingertips to promote generational prosperity, growth, and permanent infrastructure.

Generally, with respect to monetization, business tax credits fall into these categories in how they can be redeemed:

Non-refundable tax credits: This represents the majority of tax credits. These types of tax credits can be applied against tax liabilities on a dollar-for-dollar basis up to the total amount of tax (federal, state, international) that business owes.

Refundable tax credits: Upon filing a tax return (in the jurisdiction), and to the extent that the credit exceeds liabilities, the government issues a cash “refund” to the company.  

Transferable tax credits: Statutorily, these credits can be freely transferred/assigned/sold to another taxpayer (whom has liabilities in the issuing jurisdiction) at any time, subject to the rules and regulations around transfer, who then applies the credit against their liabilities.

Rebates/Grants: These incentives are monetized in the form of cash receivable from the issuing agency, without the need to first file a tax return. The former is redeemed following satisfaction of qualifying guidelines, whereas the latter is received prior to investment.

Tax Abatements: Reduction of or exemption from taxes granted by a government for a specified period, usually to encourage certain activities such as investment in capital equipment, and most commonly offered to offset property tax liabilities.

Bond Guarantees: Corporate debt securities offering a secondary guarantee that interest and principal payments will be made by a governing agency should the issuer default due to reasons such as insolvency or bankruptcy.

Statutory, Discretionary and Negotiated Incentive Distinctions: Statutory incentives include economic benefits that are earned by right if a company meets certain thresholds or performs certain activities as defined by legislative policy and which meet qualifying guidelines. Discretionary incentives are similarly legislated but require pre-application and/or pre-approval to qualify and are completely at the governing agency’s discretion, and usually include “but for” requirements – meaning, if not “but for” the incentive the economic investment and job creation would not be undertaken.

Carryforward: While some tax credits can only be claimed in the year in which they were earned, others can be “carried forward” to apply against liabilities in future (tax) years.  “Carryforward” provisions typically range from 1 year to as much as 20 years, and in regard to certain incentives, credits can be carried “back” and applied again liabilities in prior years.  Attention should also be paid to amended and re-stated returns as it pertains to credits, their use, and limitations.

Compliance: In order to earn certain credits and incentives, companies engaging in economic activity eligible for benefits and liability offsets must adhere to the rules and regulations and follow certain guidelines with respect to (1) how investment is targeted and maintained, and more important (2) the jobs and permanent infrastructure created as a result. Each incentive program (whether statutory, discretionary or negotiated) will have their own unique compliance requirements.

Maximizing the Value and Benefits of Credits and Incentives the Right Way: Leverage Tax Technology & Software Solutions

Owing to the diversity of tax credits and incentives and all forms of government assistance through economic development policy, how can your business maximize their value? How do you leverage, from a balance sheet and cash flow perspective, the economic benefits that may make the difference in how you compete on the margins and win?  Knowing the ins and outs of each potential tax credit program is crucial, as it can dictate how investments are prioritized, play a significant role in forecasting cash flow and provide the (soft equity) gap that may lead to a “go” or “no go” decision.

Understanding how to get the most out of the system, however, is nearly impossible without the best technology and access to the necessary expertise. The sad truth is that a ton of companies are either overlooking eligible incentives they should be going after, but also are not properly benefiting from the credits they have earned due to the absence of modern-day tax technologies designed to maximize their value.

Collaborating with an experienced technology partner to plan and manage a sound tax management strategy is how top organizations are able to minimize their tax liabilities each year.  Investing in an enterprise solution to manage tax credits is one of the only ways to ensure that companies are navigating the system in the most lucrative way possible each year. It’s all about dumping your tax credit concerns onto someone else’s plate – putting all the hard work into the hands of an established and reliable software platform, such as The OIX.

With years of experience slashing clients’ tax liabilities with innovative tax credit and incentive software, The OIX offers a unique and effective solution that takes all the chaos and inefficiency out of the picture. This next-generation platform streamlines the management, reporting, forecasting, analysis, workflow, monetization and compliance processes for tax credits and incentives on a worldwide scale.

By adopting tax credit software solutions through an industry leader like The OIX, you can ensure that your business isn’t missing out on any lucrative tax credits – while also positioning your company for long-term growth.

Welcome to The OIX Blog

So, how is it pronounced? We say it like it is spelled – The OIX (oʊ-aɪ-ɛks). Here at The OIX, you will find a group of tech-go-getters, policy-enthusiasts, economic-development-pioneers, adventure-seekers, as well as the cloud-based technology home of the world-class OIX Tax Credits & Incentives Platform!

We know what you are thinking. Tax Credits? Tax Incentives? These subjects are normally associated with other words like snooze, dry, boring, confusing, etc. And yes, historically the subject of credits & incentives (C&I) could be described as any of those words. However, as these types of assets take on an ever-greater role in helping companies profit and succeed in today’s hyper-competitive world, we intend to demonstrate to you that far from being boring, these hidden gems are interesting, compelling in nature and fascinating at their core – and most importantly, financially and operationally material to overall corporate success regardless of size or location.

The OIX Community Blog

This blog is intended as a two-way conversation with you, our readers, on subjects related to and surrounding C&I. Throughout these conversations we will share educational knowledge (from nuggets to five-course meals) for you to snack on throughout your week, give you some informational bits on the latest news and issues affecting C&I, and lastly and certainly most importantly enlighten you with a variety of perspectives and insights regarding this asset class so you can be in a position to leverage the tax code and help your organization compete and win on the margins.

Don’t be alarmed if our conversations start with subjects like opportunity zones, football stadiums, M&A activity, renewable energy. Trust us when we say C&I’s are a game changer for every business that fosters job creation and community investment, across all geographies, and we are here to talk about it with you in gory detail. Even more importantly we would like to learn from you.

Our goal: Educate. Inform. Enlighten. So you can: Compete. Profit. Excel.

Moving forward we will share with you our perspective on the state-of-the-art technologies, strategies and best practices emerging in the C&I arena. But just as importantly, we will discuss where the industry may be heading. This will include discussions on the future of technology innovation in the C&I world and explore such things as big data, artificial intelligence, and advanced analytics, and the role of blockchain in the coming years. We will bring you interviews and insights from thought leaders across every aspect of the industry to share their ideas with our readers.

By bringing to light these real-life case studies, our goal is to share best practices across the industry. When combined with deep analysis of government policies and objectives, we will hopefully create insights that will impact our readers’ competitiveness in the marketplace.

But our intentions don’t stop at education and best practices – we aim to assist our clients in their professional goals, as we believe many of tomorrow’s corporate leaders will spring from the ranks of C&I experts and thought leaders who are our customers. As they say, knowledge is power, and our clients have command of a niche knowledge set which, when combined with cutting edge technologies, will give them unprecedented influence and status in their organizations. As one professional in the apparel retail industry remarked recently: “Six years ago we didn’t have a single tax credit or incentive. Today, we won’t open a store or hire a person without first considering what incentives are available to us. We compete on the margin and these assets can make a huge difference.” This is a common refrain we hear day in and day out and our clients are poised to ride this emerging trend to corporate success and professional growth.

Past to Present

The OIX was founded in 2012 as a marketplace platform to enable businesses to transact in C&I assets on a principal-to-principal dynamic (i.e. trade tax credits) in order to create more value for everyone in the C&I ecosystem. In particular, The OIX sought to and achieved, vast reductions in the friction between buyers and sellers. The end result: Both buyer and seller got a better deal.

Although our marketplace was and is the single most successful and robust trading platform of its kind, our long-term goal had always been to use that technology as a sort of bridge to building an enterprise SaaS solution to help companies manage tax credits over the life cycle of these complex financial instruments. The trading platform was our initial effort to generate revenue while we learned how to address the complex dynamics of managing every kind of C&I from around the world. We’re happy to say that after years of hard-core R&D and working with clients in real time, in late 2017 we achieved that goal and in early 2018 we pivoted out of trading as a primary business (we still partner with the best brokers in the world who use our system to assist our clients optimize their tradable C&I assets) and into the de facto standard for enterprise SaaS management of C&I assets.

Our long-term vision was always that as this asset class grew in materiality and complexity, companies of all sizes would need to get control of their C&I portfolios and enhance their value to the organization. Today, our technology spans the entire ecosystem of C&I asset management in a unified, secure, collaborative, cloud-based enterprise solution that tackles these three challenges in one eloquent solution:

1)     OIX Advisory Solutions – we partner with the best of breed advisory firms of all sizes to deliver an integrated and seamless solution to determine what tax credits and incentives are best for your situation around the globe.

2)     OIX Credits and Incentives Platform – once you have secured C&I assets for your particular situation, you need to intensively manage those assets through their lifecycle. No other solution comes close to the breadth and depth and ease of use of The OIX platform.

3)     OIX Brokerage Solutions – and when your C&I assets are maturing, you have the option of instantly connecting with our brokerage partners to optimize the value of tradeable tax credits that you cannot use internally.

Head on over to the products page for more information on our Tax Credit Software

In conclusion, The OIX is focused on the end-to-end enterprise management of C&I portfolios. Keep a look out for our upcoming blog posts as we dive deeper into The OIX and how we are pioneering the future of tax credits & incentives…

Welcome to the party of Tax Credits and Incentives!

If you just can’t wait for our next blog to go live, we totally understand! Just move on over to our homepage to find out more about The OIX’s tax credit and incentive management solutions, or visit our Press Page for current and archived media coverage and thought leadership initiatives.

Please feel free to ask us any questions, we would really love to hear from you, you can reach us at: info@TheOIX.com