Much of what has been written about the Opportunity Zone program seems to focus on individual investors and specially formed LLCs that are treated as partnerships or corporations. In these arrangements, such entities funnel capital gains created from the sale of investments into Qualified Opportunity Funds (QOFs). Those funds are then invested in Qualified Opportunity Zones, or QOZs.
But what about C corporations, also known as C corps? Specifically, can a C Corp invest in an Opportunity Zone? The answer here is yes. C corporations, which include regulated investment companies and real estate investment trusts (REITs), are eligible to invest in QOFs. However, as is the case with many QOZ requirements, a C corp investment is subject to various rules and regulations.
What Is a C Corp?
Before delving into the potential connection between C corporations and Qualified Opportunity Zones, it’s a good idea to understand more about this entity. Specifically, a C corp:
- Is a legal entity separated from owners and/or shareholders
- Separates owners and shareholders from any liabilities
- Creates a double taxation situation; the corporation is taxed on income, while owners/shareholders are taxed on income at the personal level
- Must hold at least one annual meeting
- Files annual reports and related documents for transparency
Additionally, C corps are different from their S corp counterparts, in that the latter doesn’t pay tax at the federal level, but rather, “passes through” taxes, income, and deductions to shareholders. The shareholders, in turn, report revenues and expenses on their personal returns.
C Corps and QOZ Investments
A QOF can be created, or organized, as a C Corp, with the following QOZ properties counting toward the 90% test:
- QOZ stock, or stock in a corporation acquired by a QOF
- QOZ partnership interest, representing any capital or profits interest in a partnership
- QOZ business property, involving tangible property used in a QOF’s trade or business
From the time when the Opportunity Zone program was introduced as part of the Tax Cuts and Job Act of 2017, until the IRS and U.S. Treasury Department issued its final guidance in late 2019, the question of C corps and QOZs was somewhat fuzzy. However, those final regulations did indicate that C corps could create their own QOFs for investment in Opportunity Zones. The regulations also permitted subsidiary QOF C corps to invest in QOZs if if:
- The common parent directly or indirectly held 100% of QOF investor members’ stock, or
- Each QOF investor member maintained direct ownership of its QOF stock
Going a few steps further, some experts point out the benefits of organizing a QOF into a C corp structure, with help from Section 1202 of the Internal Revenue Code. Basically, this section allows for partial exclusion of gain connected to small business stock.
Specifically, under Section 1201, non-corporate taxpayers could exclude 100% of eligible gain upon the sale of qualified small business stock, or QSBS from a QOF. It’s important to note, however, that subsequent buyers of QOF stock won’t benefit from the Section 1202 gain exclusion, though they would still obtain other fund benefits.
Following the Rules
While a C corp is eligible to invest in a Qualified Opportunity Zone, this might not be the best structure for such an investment. This arrangement can offer a variety of benefits to taxpayers, but also requires a great deal of paperwork, reporting, and monitoring. As such, a discussion with a tax advisor and/or financial planner should take place when it comes to determining C corp formation into a QOF investment vehicle.