Can Banks Create Their Own Opportunity Funds?

Opportunity zones and opportunity funds were created by former President Donald Trump under the Tax Cuts and Job Act of 2017. President Trump created these investment opportunities in an attempt to turn around the economies in distressed, low-income, and underfunded areas. In order for a community to be recognized as an opportunity zone, it must receive that designation from the state and then be certified as such by the U.S. Treasury through the IRS.

The creation and evolution of these opportunity zones in the last four years has opened the door for many questions, including whether or not banks can create their own opportunity funds.

What Are Qualified Opportunity Funds?

A qualified opportunity fund is an investment vehicle, such as a partnership or corporation, that files Form 8996 with their annual tax return with the IRS. Corporations or partnerships that file Form 8896 are also required to provide verifiable evidence that they have invested at least 90% of their assets in an area that has received qualified opportunity zone status.

Under current federal guidelines, investors in a qualified opportunity zone can invest in any qualifying investment that includes equipment, tangible property, or businesses that earn 50% or more of its gross annual income from the qualified opportunity zone. In order to be considered a qualified opportunity fund, the property within the fund must be purchased by an existing QOF after December 31, 2017, and must be an existing property or business or one that will undergo “substantial improvements” within a specified period.

How Are Qualified Opportunity Funds Created?

According to the IRS, in order to create a QOF, an entity must file a federal income tax return as a partnership, corporation, or an LLC that is considered a corporation or partnership. Secondly, that corporation must show evidence that it is organized for the purpose of investing in a qualified opportunity zone under the federal guidelines set forth in the Tax Cuts and Job Act of 2017. Finally, the filing entity must verify that it holds 90% of its assets in properties that are within the qualified opportunity zone.

Can Banks Create Their Own Opportunity Funds?

According to the laws that govern qualified opportunity funds and zones, any taxpaying individual or entity is eligible to create an opportunity fund. As long as this person or entity has filled out the proper paperwork, Form 8897, they are legally allowed to create a QOF. Since banks do pay taxes, banks are eligible to create qualified opportunity funds.

Benefits of Investing in a QOF

There are multiple benefits associated with investing in a qualified opportunity fund. The most obvious of those benefits is found in tax breaks that are offered to the investors. Not only do QOFs give investors the opportunity to defer previous gains, spending considerable time as an investor in a QOF also provides tax benefits.

If an investor maintains his or her position in the QOF for more than five years, he or she receives a 10% exclusion of the deferred gain on the investment. At seven years, that deferment percentage increases to 15%, and at 10 years, investors do not owe federal income taxes on the fund’s appreciation by the date of sale. Investing in a QOF and then committing to the fund for years has major benefits for investors.

Qualified opportunity funds and qualified opportunity zones are a great chance for low-income areas to receive an influx of cash that is necessary to help repair a struggling local economy. Additionally, these funds are also beneficial to investors who are looking for ways to defer taxation on their capital gains. Since banks are considered a taxable entity, they can use their ability to create a qualified opportunity fund within their own community.