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How to Set Up A Qualified Opportunity Zone Business

By Chris Cooley Co-Founder, OZworks Group

Let’s begin with a litmus test. You’re considering setting up a Qualified Opportunity Zone Business (or QOZB). But should you? What’s the benefit aside from a tax break from Uncle Sam? 

We prefer here at OZworks Group to look at it from the social impact perspective. Sure, the 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. We know the dollar is almighty, but we believe that investment in people, areas and resources bears the most fruit in the end.

So let’s break down the steps to help our Opportunity Zone businesses and communities thrive. (And I’ll also offer some insights from establishing OZworks Group in this category.) 

3 Steps (and 5 ‘Tests’) to Becoming a Qualified Opportunity Zone Business

Federal tax law is complicated. Always has been. The myth that the tax code is over 70,000 pages is daunting enough, but the reality of several thousand pages can be just as mind-boggling to laypersons. Qualified Opportunity Zone law, established in 2017, is just a small part of that – but it’s critical to understand the steps to build and maintain QOZB compliance. 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. 

Download the OZpros Opportunity Zone Cheat Sheet for free.

1. Establish a Capital Gain

You’re looking toward future gain and scaling your business by setting up in a QOZ. In that spirit, a Qualified Opportunity Zone Business must begin with “skin in the game” via a capital gain. Traditionally you think of generating a gain through the sale of property or stock. You could even generate a capital gain through the sale of precious metals. Most people – especially small business owners – don’t have that option. 

My gain was generated by selling off a small portion – just 1 percent – of a consulting company I had established over a decade prior. The sale must be to an unrelated party – no family, and the “friends” line can be pretty fuzzy. In my case, I chatted with an independently wealthy associate who simply said, “Dude, I’ll support you.” 

You must then file paperwork to note what was sold, when, how long it was owned previously, proceeds received and ultimately how much of the capital gain will be tax-deferred through a resulting Qualified Opportunity Fund (QOF).

2. Setting Up Entities

Let’s get established – in the eyes of the government. You must file forms with the IRS newly established LLC as a Qualified Opportunity Zone Fund. Here you specify where you’re putting your capital gain. You state the amount that will be tax-deferred, and the amount of short-term and long-term gain.

In my case, because I owned my consulting business for over a year, we established a long-term deferred gain. For filing, be sure to collect information about the monies put in by investors and about your Qualified Opportunity Zone Business itself. (Curious about the paperwork involved? Here’s some info on IRS forms for Opportunity Zones.)

This includes (among other info):

  • The type of business or corporation (LLC, partnership, S-corp, etc.).
  • Qualification status.
  • First period for which the business qualifies (The month the business was established in a QOZ. You’ll want to make sure that month aligns with when you first realized the capital gain to establish the QOF. The date the QOF was established will determine if you must have a first six-month qualification test within the first calendar year. 
  • Investor interest divested during the QOF’s tax year. 

3. Where is the Qualified Opportunity Zone Business Located?

Opportunity Zones are economically distressed census tracts. They’re all over the United States – and territories – in areas that could comprise multiple counties down to single neighborhoods. The business must, well, do business within that space (with a few “tests” we’ll get to in a second).

In the case of OZworks Group, we set up the QOF in South Carolina after realizing the capital gains. But the actual QOZB headquarters is located in an OZ tract in downtown Rochester. 

It’s all about location, but not necessarily physical space alone. OZBs must meet all of the following five “tests”:

  1. 70 percent of physical assets, tangible property, must be within a Qualified Opportunity Zone Business property. (Current assets are not eligible; new assets are.)
  2. 50 percent of gross income has to come from trade or business within the Opportunity Zone.
    1. 50% of total compensation to employees and/or contractors working within the OZ.
    2. 50% of total hours worked by employees and/or contractors working within the OZ.
    3. Tangible property and management “homeruns” to the OZ (actively uses the Opportunity Zone office in the course of business activities).
    4. 50% of the gross income comes from an Opportunity Zone. 
  3. 40 percent of intangible property is utilized within the trade or business happening in the Opportunity Zone.
  4. No more than 5% of the balance sheet can be “non-qualified” financial property (QOZB-owned stocks, bonds, annuities, etc.), with exceptions for reasonable working capital. 
  5. Cannot be a “sin business” (golf courses, race tracks, massage parlors, entities allowing off-premises alcohol consumption, etc.)

OZworks Group hires our team members and contractors specifically in Opportunity Zones, not just here in Rochester, but almost anywhere else. And that potential for scalability is one of the beauties in this whole process and nationwide business model. 

Are You Ready to Set Up Your QOZB?

The process may seem complicated. Most things worth doing are. There’s a reason for all of it. It’s not just jumping through crazy hoops for a little gain in the end. The scalable potential of Opportunity Zone Businesses is substantial – with the right strategy. And that’s true whether you’re a tech company or hair salon looking to set up in a QOZ. 

Let’s build that winning strategy for investment and growth. Join our OZworks Community today to learn more!

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