By Chris Cooley
Co-Founder, OZWorks Group
Setting up Qualified Opportunity Zone Businesses can be a daunting task. A lot goes into such a project if you’re looking to establish a fund and business that accomplishes your mission (and yields a great ROI).
How do you not get overwhelmed? How do you not run into problems?
First, remember that slow and steady wins the race. Don’t rush this process of establishing a Qualified Opportunity Zone business. The federal government established Opportunity Zones to benefit businesses and investors, but the mission behind them is to spark development and job creation in economically distressed communities. To me, as I’ve said before, that should always be the first “litmus test”: Social impact.
Now, it’s not impossible to set up without expert guidance. But without an expert helping you through the process, mistakes (and silly oversights) are much more likely to happen. There are so many qualifiers and requirements. It’s navigating the immense complexities of federal tax law, so that comes as no surprise.
So What Issues Can Happen in Establishing an Opportunity Zone Business?
Here are just a few that can crop up in “going it alone” in setting up a Qualified Opportunity Zone business.
Not Establishing Capital Gain
Businesses need to set up a capital gain, considered through the sale of property, stock or even precious metals. Without an expert on hand, a business owner may not understand the need or the process in general. There must be that capital gain that can be tax deferred to get the ball rolling.
Not Setting Up Properly First & Then Meeting Compliance
Businesses must be established legally – and just as importantly established within an Opportunity Zone. This includes not only fulfilling the location requirement, but also filing forms with the IRS as a Qualified Opportunity Zone Fund and as a newly established LLC. Absent an expert, a business owner could make mistakes on a form, fill out the wrong forms – or entirely miss a form needed first for establishment or later for compliance.
Not Passing Tests
Businesses must “pass” certain tests to qualify and then maintain compliance. Without having an expert to assist in the process, a business owner may think they need to meet only a few of the following, rather than all of them.
- 70 percent of physical assets, tangible property, must be within a Qualified Opportunity Zone Business property. (Current assets are not eligible; new assets are.)
- 50 percent of gross income has to come from trade or business within the Opportunity Zone.
- 50 percent of total compensation to employees and/or contractors working within the OZ.
- 50 percent of total hours worked by employees and/or contractors working within the OZ.
- Tangible property and management “homeruns” to the OZ (actively uses the Opportunity Zone office in the course of business activities).
- 50 percent of the gross income comes from an Opportunity Zone.
- 40 percent of intangible property is utilized within the trade or business happening in the Opportunity Zone.
- No more than 5 percent of the balance sheet can be “non-qualified” financial property (QOZB-owned stocks, bonds, annuities, etc.), with exceptions for reasonable working capital.
- Cannot be a “sin business” (golf courses, race tracks, massage parlors, entities allowing off-premises alcohol consumption, etc.)
Honestly, here’s where we tend to see the most pitfalls. Especially when we start talking about property, employees/contractors, income of larger businesses that may operate both within and outside an OZ. Furthermore, the nuances can be a bit fuzzy as to what qualifies as “reasonable working capital” and what activities are permitted in association with the business.
Expert Help to Guide Your Qualified Opportunity Zone Business
These are just a few of the potential issues that could emerge in trying to get your business set up in an Opportunity Zone on your own. Don’t let yourself fall into the trap of doing this alone. We at OZWorks are here to help.
Together, we can work towards putting the right strategy in place for your business. The scalable potential of Opportunity Zone Businesses is huge. Join our OZworks Community today to learn more.
Additionally, our partners at OZpros are the best at giving you an overview of best practices for setting up your Opportunity Zone fund and structure through their strategy calls.