ARKANSAS COMMUNITY & ECONOMIC DEVELOPMENT ALLIANCE OVERVIEW: OPPORTUNITY ZONES JANUARY 9, 2019 WWW.ARCAPITAL.COM
Overview: Arkansas Capital Corporation 2 ARKANSAS CAPITAL CORPORATION
ACC: It All Began Over BBQ 3 ARKANSAS CAPITAL CORPORATION
Innovative Entity: Private Non Profit Founded in 1957, Not a governmental entity but has a public purpose, working to create and sustain long-term economic development opportunities and helping communities thrive. Key Founders: Winthrop Rockefeller, John Tyson, Harvey Couch Jr, Charles Murphy, Horace Cabe, John Ed Chambers, Raymond Rebsamen, JA Riggs Jr, William Darby and Robert Young Jr. Key Partners: Small Business Administration, Department of Treasury CDFI Fund, Department of Agriculture Private Banking Syndicate. Impact: +$1.5 Billion in capital deployed since 1957 and nearly 10,000 students received entrepreneurship education since 2001. Partners with more than 100 community banks in Arkansas and is ranked consistently as one of the largest SBA and USDA lenders in Arkansas. 4 ARKANSAS CAPITAL CORPORATION
Overview: Opportunity Zone Tax Benefit 5 ARKANSAS CAPITAL CORPORATION
Challenge • 52 million Americans, or 1 in 6, live in distressed communities • Since 2000 - 450,000 net new businesses created in prosperous zip codes and 80,000 net business closures from distressed zip codes. Business growth is a key to job growth. • Opportunity Zones encourage capital investment in a concentrated set of distressed tracts to encourage new or expanding business activity. 6 ARKANSAS CAPITAL CORPORATION
Opportunity Zone Tax Benefit • Signed into federal law with no appropriations cap as part of the Tax Cuts and Jobs Act of 2017. • Investors currently hold +$2.3 trillion in unrealized capital gains. Joint Committee on Taxation estimates the tax benefit will cost $1.6 billion between 2018-2027. • Encourages long-term equity investments into targeted low-income communities through Opportunity Funds, incentives are tied to the longevity of the investment. 7 ARKANSAS CAPITAL CORPORATION
Opportunity Zone Tax Benefit Sends IRS Form 8996 Investor with Capital Gain to the Department of elects to invest into OZ Treasury Fund, OZ Fund makes equity investment into eligible project Don't Forget About Securities Law Qualified Opportunity Zone Property Qualified Opportunity Zone Stock or Qualified Opportunity Zone Partnership Interest 8 ARKANSAS CAPITAL CORPORATION
Opportunity Fund Investors Any individual, corporation, or trust, whether foreign or domestic, Can defer an unlimited amount of capital gain from the sale or exchange of any property (stock, business assets, personal assets, or any other property) to an unrelated party. Note No direct tracing of the funds which allows for borrowing towards basis. by investing part or all of the proceeds from such sale or exchange in a ‘‘qualified opportunity fund,’’ during the 180-day period beginning on the date of the sale or exchange. Only capital gains realized in sales or exchanges on or before December 31, 2026, can be deferred under this program. 9 ARKANSAS CAPITAL CORPORATION
What are Opportunity Funds? Any corporation or partnership organized for the purpose of investing in qualified opportunity zone property. Opportunity Fund self certifies by completing IRS form 8996 and attaching that form to the taxpayer’s federal income tax return for the taxable year. Fund must invest at least 90% of its assets into eligible Opportunity Zone property. Financial penalties on the unqualified amount for not passing the 90% test. 10 ARKANSAS CAPITAL CORPORATION
Qualified Opportunity Fund – Assets Test Must hold at least 90% of assets in QOZP, determined by the average of the percentage of QOZP held on: The last day of the first six month period The last day of the of the fund’s taxable fund’s taxable year year, and June 30th December 31st JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC 11 ARKANSAS CAPITAL CORPORATION
90% Testing Key Points Form 8996 starts the clock for testing. Funds get a maximum of 6 months to invest but may not be 6 months if say fund was formed in December it would have 1 month. If the project invested in has asset values reported on their financial statements those values are the ones to be used, if they do not have values then cost accounting is to be used in measuring tangible assets, If values used are projects financial statements that means fair market value is used, (Sample Issues: depreciation, asset impairment, how to measure assets for first six month test if financials prepared annually) Cash held at the project level may qualify under working capital safe harbor if the project has a written plan that identifies the financial property in the OZ, written schedule consistent with ordinary business operations of the business and the business substantially complies with the schedule and uses the money within a 31 month period. HEARTLAND RENIASSANCE FUND AN AFFILIATE OF ARKANSAS CAPITAL 12 CORPORATION
Opportunity Fund Key Dates 12/31/2019 investment deadline for seven year hold period benefit 13/31/2021 investment deadline for five year hold period benefit 1/1/2027 capital gains need to be recognized 12/31/2028 Opportunity Zone designations expire 1/1/2048 Investment assets need to be disposed of prior to 13 ARKANSAS CAPITAL CORPORATION
What Are Opportunity Zones? Arkansas has 85 certified Opportunity Zone Tracts effective until December 31, 2028. Does not guarantee investment into any designated areas. Funds and investors make their own investment decisions based on the merits of each investment opportunity. Nationally 11% of all tracts are qualified tracts (9,700 tracts qualified) Department of Treasury - CDFI Fund has a national mapping tool online https://www.cdfifund.gov/pages/opportunity-zones.aspx 14 ARKANSAS CAPITAL CORPORATION
Arkansas Opportunity Zones 15 ARKANSAS CAPITAL CORPORATION
Opportunity Zone Property Tangible property used in a trade or business if such property (i) was acquired by purchase from unrelated party after December 31, 2017, (ii) the original use of such property in the QO Zone commences with the QO Fund or the QO Fund substantially improves the property, QOZBP will be treated as substantially improved by a QO Fund only if during the 30 month period beginning after the date of acquisition, the additions to the basis of such property exceed the adjusted basis of such property at the beginning of the 30 month period. (iii) substantially all of the use of such property was in a QO Zone during substantially all of the QO Fund’s holding period for the property. 16 ARKANSAS CAPITAL CORPORATION
Opportunity Zone Business To qualify as an Opportunity Zone Business: ◦ Partnership interest or stock acquired in exchange for cash after 12/31/2017 and the business was qualified OZ business when the fund acquired equity or interest. ◦ substantially all of the tangible assets of the business must be used in an Opportunity Zone (70% threshold), there is a tangible property safe harbor. ◦ for intangible property no limit stated but intangibles must be used in the active conduct of a business in the Opportunity Zone. ◦ at least 50% of the gross income earned by the business must be from the active conduct of a business in the Opportunity Zone. ◦ business can hold only a limited amount of cash or other investment assets (5%) plus reasonable working capital with the working capital safe harbor. IRS guidance does allow for a 31 month safe harbor for cash at the project level in an indirect investment model as long as there is a written plan and the project substantially adheres to the written plan. ◦ No sin businesses under an indirect fund model. 17 ARKANSAS CAPITAL CORPORATION
Ineligible Opportunity Zone Businesses A Qualified Opportunity Zone Business cannot engage in any of the following “sin” businesses: any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, any store the principal business of which is the sale of alcoholic beverages for consumption off premises. Note: third party legal professionals have mixed opinions on medial marijuana related facilities would be included in this definition. 18 ARKANSAS CAPITAL CORPORATION
Opportunity Zone Benefits Benefits at the federal level include: • tax deferral, • partial “forgiveness” of capital gains, (5 year 10% adjustment / 7 year 15% adjustment) • possible tax free investment appreciation for qualified investments ( 10 years) 19 ARKANSAS CAPITAL CORPORATION
Partial Forgiveness and Forgiveness of Additional Gains Basis is equal to Fair Market Value Forgiveness of gains on appreciation of investment SALE Basis increased by Basis increased by 10% of the 5% of the Requires an INVESTMENT deferred gain deferred gain election Up to 90% taxed Up to 85% taxed HELD FOR 5 YEARS HELD FOR 7 YEARS HELD FOR 10 YEARS 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 20 ARKANSAS CAPITAL CORPORATION
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