The third incentive for investors here is an appreciation exclusion. If a taxpayer’s investment in the qualified opportunity fund is held for at least 10 years, the basis in the fund is increased to the fair market value on the sale, and the gain is eliminated.
The main drawback of investments in opportunity zones is that they are tied up for at least 10 years and could continue until 2047—almost 27 years if you invest today. That is a long time for many people to stay in the same investment. Still, it could be ideal for long-term estate planning strategies for children and grandchildren. Grantor trusts in particular are a powerful, supercharged way of transferring qualified opportunity fund investments to heirs. The qualified opportunity fund investment can be sold after 10 years with all the appreciation being tax free—making it roughly the equivalent of a powerful Roth IRA investment (without the required minimum distribution limitations imposed by the SECURE Act, which stopped distributions from paying out longer than 10 years).
Qualified Small Business Stock
Qualified small business stock has been around since 1993, but for a variety of reasons it didn’t really become a valued and treasured tax incentive until about 2010—and even then the word was initially slow to spread.
Today, however, qualified small business stock has become the unquestioned diva of the tax planning world—the riveting center of attention in every sophisticated conversation on tax and business structuring issues.
In 2021, this stock does not, by itself, make you rich, but when used as part of a successful investment strategy, it does make you considerably richer.
Qualified small business stock allows a successful investor in an entity that meets the definition of a qualified small business to exclude 100% of the gain recognized on the sale of the stock up to the greater of two figures:
• Up to $10 million of the cumulative gain on dispositions of the stock issued by the particular qualified business to the taxpayer (this is called the “$10 million limitation”); or
• Up to 10 times the aggregate adjusted tax basis of the qualified small business stock issued by the business and disposed of by the taxpayer in a taxable year (this is called the “10-times-basis limitation.”)
To qualify, the stock and the underlying business must meet certain technical requirements, and the investor has to hold it for at least five years before selling—just half the holding time required by the opportunity zone tax incentives.
Moreover, the investor can share the wealth and make the tax savings multiply with tax planning that successfully transfers the small business stock through gifts to children and also through transfers in trust for the benefit of children and other parties.
This transferability is a particularly attractive trait of this type of stock in 2021, since the current political dynamics suggest a significant possibility of large tax increases on the horizon.
In summary, there is change in the air and as summer draws to a close there is a very real expectation that tax rates could go up—perhaps by a lot. Tax-free returns are a very real antidote to higher taxes—free, after all, is free—and so the three strategies discussed in this article should be something you consider carefully while making the best of the remaining days of summer.
Joseph B. Darby III, Esq., is an adjunct professor at the Boston University School of Law and the founding shareholder of Joseph Darby Law PC, a law firm that concentrates on sophisticated tax and estate planning for individuals and businesses.