Can You Get Tax Breaks for Opportunity Zone Employees?

Can You Get Tax Breaks for Opportunity Zone Employees?

Posted by Clay Schmidt on Oct 7, 2021


Between October 2018 and December 2019, the Internal Revenue Service and the U.S. Department of the Treasury released three guidance reports on the Opportunity Zone program. The guidance focused on clarifying the parameters of this economic revitalization/tax deferral program, outlining everything from the 90% asset test to gains that qualify for Qualified Opportunity Zone (QOZ) investments.

Noticeably missing from these reports – and from the program itself – is whether a Qualified Opportunity Zone Business owner, or owners, can get tax breaks for opportunity zone employees. Can a real estate developer who is renovating a hotel in a QOZ obtain tax breaks from the construction employees who are working on the project? And, once the hotel is open, could the property owner receive a reduction in taxes from on-site personnel?

While the premise of the Opportunity Zone agenda is on creating jobs in lower-income areas, it isn’t set up to create tax breaks for QOZ employers. Opportunity Zone business owners interested in employee tax breaks have two options, neither of which are affiliated with the QOZ program.

Work Opportunity Tax Credit

The WOTC is a credit for employers that hire individuals from target groups, who continue to face barriers to employment. Members of these targeted groups include the following:

  • Qualified IV-A recipient
  • Qualified veteran
  • Ex-felon
  • Designated Community Resident (DCR)
  • Vocational rehabilitation referral
  • Summer youth employee
  • Supplemental Nutrition Assistance Program (SNAP) recipient
  • Supplemental Security Income (SSI) recipient
  • Long-term family assistance recipient
  • Qualified long-term unemployment recipient

In reference to the above, a DCR must reside in an empowerment zone, enterprise community or renewal community, and must continue to live in that location even after employment. If any of these zones/communities are part of a federally designated QOZ, then the employer could conceivably receive a tax credit for hiring this employee.

And if the employees receive SNAP or any other assistance from the above-referenced government programs, the QOZ employee can receive the WOTC.

Disabled Access Credit

The Disabled Access Credit offers small business employers up to $5,000 if they generate expenses to provide access to people with disabilities. In this case, a “small business” is defined as one that earns $1 million or less and has had 30 employees or fewer in the previous year. Using the above-mentioned hotel as an example, if the owner hires fewer than 30 employees, and spends money to provide disability access, he or she could benefit from the Disabled Access Credit. 

Purpose of Opportunity Zones

The above two programs – as well as other potential tax-credit/tax-deduction programs – can provide savings for employers, no matter where they operate. These tools aren’t specific to Qualified Opportunity Zones, however.

Once again, when addressing the issue of tax breaks for Opportunity Zone employees, it’s important to remember the spirit of the program. The focus is on economic renewal and, as a part of that, investor tax breaks. Any tax breaks that QOZ employers receive should come from already existing programs.

There are material risks associated with investing in QOZ properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Costs associated with the transaction may impact investors’ returns, and may outweigh the tax benefits. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.

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