Opportunity Zones and Start Up Tech Companies

Date: November 02, 2018

Publication: Thompson Hine Update

Read a comment letter sent to the IRS requesting guidance regarding Opportunity Zones provisions in connection with (1) the use of Qualified Opportunity Fund dollars towards operations (other than tangible property development) and (2) start-up tech businesses where the focus is the development of intangibles, such as software and biomedical technology. Some of these points were raised in the Bloomberg article titled, “Tax Law’s Capital Gains Gift gets Dialed Back for Tech Investors.”

The attached letter raises six areas that need further guidance with respect to Opportunity Zone tax provisions and tech businesses:

    1. Need for a safe harbor period during which the start-up is using the cash investment towards operations and not engaging in the active conduct of a business. 
    2. The effect where a limited amount of invested cash is used towards tangible property purchase or expansion, and the bulk of the investment is applied towards operation (non-real estate development). This includes using the invested cash towards license costs and compensation expense.
    3. Treatment of leased space in the 70% new tangible property calculation test and the application of the five-year extended safe harbor if the 70% test is no longer satisfied based on the decreasing value of acquired property over time.
    4. Effect of using licensing agreements with parties outside the Opportunity Zone and receipt of revenue for licensing outside the Opportunity Zone.
    5. Adopting a working capital safe harbor that allows for invested cash to be absorbed in operations (non-real estate development) over an extended period.
    6. Allow the requested working capital safe harbor period to delay the needed purchase of required tangible property to satisfy the 70% requirement and satisfying the required Opportunity Zone Business requirement following the Fund investment in a pre-existing entity, rather than at the time of the Fund investment.

For more information, please contact Frank Ferrante or any member of the firm’s real estate or commercial and public financing groups.

Francesco A. Ferrante
Thompson Hine LLP
Phone: 937.443.6740
Mobile: 937.470.0598
Francesco.Ferrante@ThompsonHine.com