3. A substantial portion of the intangible property is used in the active conduct of the QOZB;
4. Less than 5 percent of the average unadjusted bases of property is attributable to nonqualified financial property; and
5. The business does not include certain enterprises such as golf courses, country clubs and liquor stores.
Concerning the list above, there is one challenge presented by the 50 percent gross receipts requirement. Uncertainty exists about how those gross receipts will be measured and whether those sales must occur within the QOZ; however, reports from the most recent public hearing indicate that forthcoming final regulations may lessen or altogether eliminate such a requirement. If that does become the case, the requirements outlined above would not significantly affect the nature of how a private equity group evaluates and operates a portfolio company.
While many have been hesitant to finalize QOFs in the absence of Treasury regulations, those concerns will soon be alleviated. Moreover, once those final regulations are issued, the proverbial clock will start ticking due to the timeline of the incentives described above. In order to receive the full benefit of basis step-ups, investments in eligible QOFs will need to be finalized by Dec. 31, 2019, due to the requirement that taxes on deferred capital gains must be recognized on Dec. 31, 2026. That being said, if investors are merely interested in the 10-year basis step-up election, a QOF investment could be made as late as June 28, 2027.
Ultimately, while access to more capital does not directly resolve the swelling multiple problem for private equity, access to cheaper capital might. With over 8,700 different QOZs designated across the country, it might take a bit of time to pare down that amount of data; however, the potential tax-advantaged benefit may be well worth the effort.
Seek Help When Needed
As can be seen, these new and changed provisions are highly nuanced and require careful analysis. A professional tax provider may be able to help analyze how your fund can best take advantage of the changes within the TCJA.
Christopher Hanewald is a senior tax research and transaction specialist at CBIZ MHM.