Operating a business within an opportunity zone means participating in improving the economic prosperity of a specific area. There are a few requirements that must be met before any business can qualify as an opportunity zone business. In this article, we’ll look at what those qualifications are and the types of businesses that can operate in them.
What is a Qualified Opportunity Zone Business (QOZB)?
A Qualified Opportunity Zone Fund (QOZF) can invest in a wide range of products. QOZFs often invest in real estate, which includes real property and infrastructure (except for government-owned infrastructure). Think of real property like real estate, or, more specifically, land and immovable property on land, such as buildings.
Then there are qualified opportunity zone businesses (QOZB). QOZBs range in scope, and can include anything from tech start-ups, healthcare research and development firms, and even oil and gas exploration companies. Typically, qualified opportunity funds will invest in one qualifying business, or several that operate within a similar vertical.
There are a couple of ways investors and funds can get involved in QOZBs:
- Equity investments in new or expanding businesses by purchasing original-issue stock.
- Taking ownership of original interests in partnerships.
If the above investment approaches look familiar, it’s because they are similar to the style used by venture capitalists. Let’s now shift to the specific requirements needed to qualify as a QOZB.
There are a few qualifications that businesses must meet to be included in a QOZF. One is the active conduct of business. As laid out by the treasury, a QOZB must meet the following requirements as well:
- Substantially all of the tangible property that is owned or leased is located in an OZ. According to the IRS, substantially all equates to “at least 70%.”
- 50% of total income is derived from the active conduct of a qualified business within an OZ.
- The second round of regulations provided a safe harbor that 50% of the business’ services, based on the hours of employees and contractors, that can be done in an OZ.
- Less than 5% of the average of the unadjusted aggregate basis of the business’s property must be attributable to non-qualified financial property.
- At least 40% of the business’s intangible property must be used in the active conduct of a qualified business in an OZ.
Types Of Businesses That Are Not Eligible
Any business type that meets the above requirements and is not one of the following is eligible: Not a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off-premises.
There are several requirements for a business to successfully operate in an opportunity zone as a qualified business. With the second round of regulation updates, the IRS has shed more light on these requirements, making them clearer for investors who want to get involved.
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.