Plenty has been written about the Opportunity Zone from the point of view of Qualified Opportunity Business Zone Property, or QOBZP. However, when it comes to defining “property,” the main focus tends to be “real estate.” As such, many of the examples pertaining to assets and substantial improvement involving Qualified Opportunity Zones (QOZs) and their investments via Qualified Opportunity Funds (QOFs) range from ground-up construction to renovation or rehabilitation.
But QOBZP doesn’t just refer to buildings or construction. According to the IRS, QOZBP consists of any tangible property used in a trade or business. This can mean real estate. It can also mean a copy machine in an opportunity zone office.
Does this also refer to medical equipment? Can medical equipment be used as improvement in opportunity zones? Because not a whole lot has been written about healthcare facilities and opportunity zones, there isn’t a direct answer to this question. But if we consider medical equipment as tangible property used in an Opportunity Zone trade or business, then the answer would be yes. . .but.
Healthcare and QOZs
It’s surprising that more hasn’t been written about healthcare providers and Opportunity Zones. Many hospitals and health systems are located either near or in Opportunity Zones (or want to enter new markets that are located in the federally designated QOZs). This makes sense; these institutions are focused on improving health in populations. As such, if these entities partner with the right QOFs, they can receive monies and tangible goods to enhance patient outcomes, while boosting healthcare initiatives.
But the healthcare systems and hospitals in lower-income areas can’t just pour money into improving a facility and write that off as an Opportunity Zone investment. These organizations need to form LLCs or partnerships as QOFs. And, more often than not, those partnerships would likely include a community development institution, to help with grants and loans.
Now we know that our healthcare system can make use of the Opportunity Zone program, let’s see whether the equipment it might acquire (or enhance) can be considered “improvement.”
How Medical Equipment Might Qualify
Once again, very little information exists about medical equipment within QOZs. But there is enough written about what qualifies as tangible property under the Opportunity Zone program. The IRS is pretty clear that equipment and supplies can be considered QOZBP under the following situations:
- It’s used for a trade or business located in a QOZ.
- If not located in the QOZ zone, the equipment or machinery must be intended for a business that earns half or more than its revenue from operations within a QOZ.
Furthermore, the equipment:
- Must have been acquired after 2017.
- Must have been acquired arms-length by an unrelated third party.
At the beginning of this article, we indicated that a copy machine would be considered tangible equipment that might qualify for substantial improvement treatment, as long as the copy machine was located in a QOZ office. The same situation would hold true for a hospital or medical center in a Qualified Opportunity Zone.
For example, if a QOF buys an MRI for a hospital located within an Opportunity Zone, this would signify substantial improvement. The “place of business” (i.e., the hospital) is in the QOZ. It does most of its business in this location. And the MRI acquired could be counted toward the substantial improvement requirement.
But what if that hospital has a satellite office that isn’t located in the QOZ, and the QOF buys an x-ray for that outlying location? As long as that parent hospital continues earning at least half or more of its revenues in the QOZ, that x-ray could also go under the substantial improvement umbrella.
Keep in mind that for the above equipment to be used for substantial improvement, the hospital must have received it after 2017, and that an unrelated third party would need to purchase it. This means the hospital can’t be a partner of the QOF, but rather, the recipient of its funds.
Property - It's Not Just Real Estate
When considering what property can (and cannot) be used for improvements in Opportunity Zones, it’s important to understand the definition of “property.” It’s tangible. And it’s directly used in trade or business. Within this definition, medical equipment could fall under that umbrella.
However, similar to other points in the Opportunity Zone program, using medical equipment for substantial improvement is subject to various requirements. It’s important to understand this to achieve the benefits of the program.
