The introduction of Qualified Opportunity Zones has created an effective tax planning opportunity for taxpayers to reduce their federal income taxes while providing needed investment and funding for economically challenged areas. While it’s unclear how investments in Qualified Opportunity Funds will change these areas, investment has become an increasingly popular way for Ohio companies and investors to defer capital gains tax. In fact, Ohio recently approved the creation of a state tax credit for investments made in opportunity zones. The new program, which was originally presented as part of House Bill 8 and signed into law earlier this month, provides 10% of the taxpayer’s investment (in the prior year) as a credit. The incentive is designed to increase opportunity zone investments within the state. It also creates a new tax planning opportunity that many should explore. To help clients, prospects and others understand the incentive, GBQ has provided a summary of key details below.
To qualify for the program, the investment must be made with opportunity funds that include 100% of assets invested in Ohio based opportunity zones. Since it’s unlikely that a fund exists which is solely focused on Ohio, it’s expected the program will create investment funds focused exclusively on state zones.
There is a limit to the amount of benefit that a taxpayer can realize through the program. The total credit is limited to $1M per fiscal biennium ($10 million investment). There is also the restriction that once the Ohio Development Services Agency has awarded $50M in tax credits for a two-year period, no additional credits are available until the next biennium. This means some taxpayers could miss the opportunity to claim the credit if the limit has been exceeded.
Taxpayers must apply for the tax credit before they can reap the benefit. Applications need to be submitted between January 1st and February 1st in the year following the initial investment. As an example, if a qualifying investment was made before the end of 2019, taxpayers would need to apply in the following January to be eligible for consideration. The state may take up to 60 days to review the application and determine if it will be awarded. It’s important to note that credits are awarded on a first-come, first-serve basis, so it’s important to file as soon as possible.
The tax credit is transferrable but may only be done so one time. No additional transfer will be permitted. It’s also important to note the credit must be used within the initial five-year carryforward period.
The new tax credit is sure to attract the attention of Ohio developers, investors and others who can benefit from directing their investments to the state. It’s expected the new program will provide a boost to local opportunity zones. If you have questions about the new program or need assistance with state tax planning or compliance issues, GBQ can help! For additional information, call us at 614.221.1120 or connect with our Ohio Opportunity Zone team. We look forward to speaking with you soon.