38 OPPORTUNITY ZONE MAGAZINE | VOLUME 2 • ISSUE 1
the management or operation functions performed in an OZ are necessary for the generation of at least 50 % of the QOZB ' s gross income .
As mentioned earlier , both the QOF and the QOZB must meet certain qualifications . For a QOF , at least 90 % of its assets must be Qualified Opportunity Zone property determined by averaging the percentage of Qualified Opportunity Zone property measured on the last day of the first six month period of the QOF ' s year end and on the last day of its year end . For a QOZB , at least 70 % of its tangible property which is either owned or leased must be a Qualified Opportunity Zone property . This requires that the property be : ( 1 ) acquired by purchase after Dec . 31 , 2017 ; ( 2 ) if its real property purchased by the QOZB , the original use commences with the QOZB or the QOZB substantially improves the property ; or ( 3 ) substantially all of the use of the tangible property is in an OZ .
Combining the provisions together , a sponsor creates a QOF which will invest in the QOZBs which will be QSBSs .
Like the QSBS rules , there are certain excluded businesses . These businesses include so-called sin businesses as follows : ( 1 ) private commercial golf courses , ( 2 ) massage parlors ; ( 3 ) hot tub facilities ; ( 4 ) sun tan facilities ; ( 5 ) race track or other facilities used for gambling ; ( 6 ) any store whose principal business of which the sale of alcoholic beverages for consumption on premises .
Combining the provisions together , a sponsor creates a QOF which will invest in the QOZBs which will be QSBSs . This means they are C corporations which are small business ( less than $ 50 million in assets ) that will satisfy the QOZB requirements by having at least 70 % of their tangible property owned or leased in an OZ . Although the general goal may be to hold the shares of the QOZBs were at least 10 years , the Section 1202 and Section 1045 Rules allow the QOF to sell the shares in a shorter period . Under Section 1045 , if the QOZB shares have been held for at least six months , the QOF can reinvest the gain within a 60- day period beginning on the date of sale of the QSBS shares . If the QOF holds the shares for at least five years , the gain to the individual investors up to $ 10 million can be excluded from taxable income by the investors . Finally , if the QOZB shares are held for at least 10 years , all gain can be excluded for federal income tax purposes . This suggests that real tax benefits can be obtained by either starting a new business or investment in an OZ or relocating an existing business to an OZ .
We now have a new administration in Washington that might further the benefits of QSBSs and OZs . If the Biden administration is successful in increasing capital gains rates or having capital gains taxed at ordinary rates , the benefits of QSBSs and OZs will increase . The higher the federal tax rate , the more valuable this form of tax planning .
Phil Jelsma is partner and chair of the tax practice team at Crosbie Gliner Schiffman Southard and Swanson LLP ( CGS3 ), a Californiabased commercial real-estate law firm . With a 30-year background in real-estate exchange transactions , syndications and nonprofit corporations , Jelsma is widely recognized as a leading joint venture and tax attorney in California . His practice focuses on business and tax planning , and he regularly advises on entity formation , fiduciary duties , inter-partner relationships , recapitalizations and reorganizations , and corporate governance . Jelsma has been an adjunct professor of tax law at the University of San Diego School of Law since 1989 .
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