Overview

The following are examples of the use of the QOZ provisions by existing businesses and with respect to investment property held within a QOZ. Some of these may be permitted, and further IRS guidance might confirm these applications.

  • Businesses within a QOZ that plan a real estate expansion.

    • If the operating business entity has capital gains eligible for investment, it might be permissible for the business entity to form a QOF that engages in a QOZ Business (though a pass-through entity), which then leases such developed property to the operating business. Further IRS guidance could be very relevant to this application.
    • If the individual owners of an operating business entity have capital gains eligible for investment, it might be permissible for such individuals to form a QOF that engages in a QOZ Business (through a pass-through entity), which then leases such developed property to the operating business. Further IRS guidance could be very relevant to this application.
    • The proposed regulations do not permit individual owners to invest their capital gains dollars through their business entity, which would then invest through a QOF.

An important point related to these arrangements is how future IRS guidance will apply the “conduct of an active business” requirement in a leasing arrangement between related parties.

  • Businesses within a QOZ that plan to expand operations and use capital gains investment dollars toward operational expenses, such as license and compensation costs, including, for example, businesses engaged in software development or biomedical operations.

    • Under the current regulations, there are a number of obstacles to the application of the QOZ program in this context. We have submitted a comment letter to the IRS that suggests changes to allow for this form of investment.

  • Land or a building within a QOZ that could be sold for development or substantial improvement, with the resulting capital gains used through a QOF structure for other investments.

    • Prior to issuance of the proposed IRS regulations, some questioned whether the QOZ tax benefits were available for capital gains from the sale of real property within a QOZ. However, the proposed regulations do not mention that capital gains from the sale of property within a QOZ is ineligible for the QOZ program.
Our QOZ Existing Businesses Team Members: