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 yet unclear how investments in Qualified Opportunity Funds will ultimately impact these areas, investment in opportunity zones has become an increasingly popular way for Ohio companies and investors to defer capital gains tax.
Ohio 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, provides 10% of the taxpayer’s investment (in the prior year) as a credit. The tax credit is designed to increase Ohio opportunity zone investments. 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.
Tax Credit Eligibility
To qualify for the program, the investment must be made with opportunity funds that include one hundred percent of assets invested in Ohio based opportunity zones. Since it may be unlikely that a multi-asset fund exists which is solely focused on Ohio, it’s expected that taxpayers will create investment funds focused exclusively on state zones.
Tax Credit Limits
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% of a $10 million investment). There is also a cap of $50M on the total allocation of credits. 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 opportunity zone tax credit before they can reap the benefit. Applications need to be submitted between January 1 and February 1 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. Other Ohio tax credits with a similar application process are often fully subscribed within days.
The tax credit is transferable to another taxpayer, but may only be transferred 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 opportunity zone 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 another state for 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.
Article written by:
Darci Congrove, CPA