Treasury Issues Rules on Tax Breaks for Opportunity Zones
WASHINGTON — The Trump administration released regulations on Wednesday that could help venture capitalists, Native American tribes and entrepreneurs benefit from a new tax incentive meant to encourage investment in struggling communities.
Backers of that incentive, known as Opportunity Zones, had complained to the administration in recent weeks that its regulations could end up steering most of that money into real estate development, rather than start-up businesses that are more likely to create well-paying jobs.
The rules released on Wednesday appeared to ease many of those fears. But critics said the administration had not done enough to make sure that the program achieved its goals.
Under the 169-page proposed regulation, the second in a series of rules meant to clarify the 2017 tax law that created the zones, investors can take advantage of the tax breaks in several ways. The new methods are particularly important for investors who hope to fund new coffee shops, grocery stores or possibly, as administration officials conceded on Wednesday, marijuana dispensaries in states that have legalized the drug.
“This round of regulations removes some of the most significant impediments keeping capital on the sidelines, especially as it relates to operating businesses,” said John Lettieri, president of the Economic Innovation Group, a Washington research organization that developed and championed the Opportunity Zone concept.
Senator Tim Scott of South Carolina, the Republican who inserted the zones into the tax law, said in a news release that the proposed regulations “took some good steps forward” toward helping investors and business owners. Late last week, Mr. Scott said in an interview that he was “concerned right now” about the administration’s approach to the regulations.
The tax incentive promises investors the chance to defer, reduce or — when investments are held for more than a decade — eliminate taxes on certain capital gains, provided they invest in Opportunity Zones. Those areas were identified by states last year based on criteria that included poverty and income levels.
After two rounds of regulations, and sustained criticism from economists who suggested ways to make the program more accountable, the government will still have no system for tracking investments in the zones and whether they are helping communities as advertised. Treasury officials said Wednesday that they were seeking proposals for how the department should collect data on Opportunity Zones.
“This thing’s been in place for 17 months and now you’re going to ask for comments about data collection?” said Olugbenga Ajilore, a senior economist with the liberal Center for American Progress in Washington. “It’s frustrating. There needs to be some accountability to the community.”
Even before the administration has finished issuing its rules, the zones have become a boon for real estate developers and drawn criticism from people who say they will mostly enrich well-heeled investors and speed up the displacement of low-income residents in gentrifying areas.
Treasury officials have developed a series of tests, in the regulations they began releasing in October, for which investments should qualify for the tax breaks. One key test many local officials use to evaluate the zones is whether the tax breaks encourage job-creating businesses, not just condos, retail stores, hotels and other real estate projects that often don’t create many permanent jobs with opportunities for advancement.
Mr. Scott and others have urged officials to set rules that encourage investment in entrepreneurship, and to attract a wide variety of investors, including venture capitalists who could establish funds that would back multiple projects in various zones.
The rules released on Wednesday, ahead of a White House meeting on the program, seek to meet that request in several ways.
They include provisions that will allow investors to qualify for the breaks even if the businesses they fund focus on exported goods or services or the domestic market outside the zone. Long-vacant properties will immediately qualify for the tax breaks. Investors will be allowed to share their stakes in funds that invests in the zones, and to sell, say, a start-up in an Opportunity Zone as long as the money is reinvested in another qualifying business or asset. Real estate investors will be allowed to lease and refinance their properties.
Mr. Trump heralded the regulations and the program, calling the zones “really a crucial part of our new tax law to help low-income Americans.”
“As you know,” he said at the White House, “this vital provision gives businesses a massive incentive to invest and create jobs in our nation’s most underserved communities.”
Supporters of the zones said the regulations could still be improved to encourage even more business investment.
Some critics acknowledged that the new rules included important provisions to help more communities take advantage of the zones. Making leased properties eligible for the tax breaks could help Native American tribes, for example, because they often lease their lands to businesses.
The proposal also allows Treasury officials to revoke a tax break for any Opportunity Zone project “if a significant purpose of a transaction is to achieve a tax result that is inconsistent with the purposes” of the program.