On December 19, 2019, the U.S. Treasury Department and the IRS issued final regulations (T.D. 9889), which provide much-anticipated guidance on tax-favored qualified opportunity zone investments. The 544-page regulation package generally retains the same approach and structure of the proposed regulations issued in October 2018 and April 2019 (prior Hanson Bridgett analysis available). The final regulations were designed to “make the rules easier to follow and understand,” but also include many taxpayer-favorable changes and additions.

The Treasury Department also posted a series of helpful FAQs highlighting certain differences between the proposed and final regulations. Excerpts from these FAQs are included below:

Sales of business property — The proposed regulations only permitted the amount of an investor's gains from the sale of business property that were greater than the investor's losses from such sales to be invested in QOFs, and required the 180-day investment period to begin on the last day of the investor's tax year. The final regulations allow a taxpayer to invest the entire amount of gains from such sales without regard to losses and change the beginning of the investment period from the end of the year to the date of the sale of each asset.

Aggregation of property for purposes of the substantial improvement test — QOFs and QOZBs can take into account purchased original use assets that otherwise would qualify as qualified opportunity zone business property if the purchased assets:

• Are used in the same trade or business in the Qualified Opportunity Zone (QOZ) or a contiguous QOZ for which a non-original use asset is used, and
• Improve the functionality of the non-original use assets in the same QOZ or a contiguous QOZ.

In certain cases, the final regulations permit a group of two or more buildings located on the same parcel(s) of land to be treated as a single property. In these cases, any additions to the basis of the buildings in the group are aggregated to determine satisfaction of the substantial improvement requirement. Thus, a taxpayer need not increase the basis of each building by 100% as long as the total additions to basis for the group of buildings equals 100% of the initial basis for the group.

Leasing — The final regulations provide several changes to leasing provisions in the proposed regulations:

• State and local governments, as well as Indian tribal governments, will be exempt from the market-rate requirements for leased tangible property,
• Leases between unrelated parties are generally presumed to be at market rate terms, and
• Short-term leases of personal property to lessors using the property outside a QOZ may be counted as Qualified Opportunity Zone Business Property (QOZBP).

Working capital safe harbor — The final regulations provide several refinements to the working capital safe harbor:

• They create an additional 62-month safe harbor for start-up businesses to ensure that they can comply with the 70-percent tangible property standard, the 50-percent gross income requirement, and other requirements to qualify as a QOZB;
• They provide that a QOZB can receive an extra 24 months to use working capital if the QOZ is in a Federally-declared disaster area;
• They clarify that the safe harbor can only be used for a 62-month period and that amounts remaining at the conclusion of the period cannot be counted as tangible property for purposes of the 70-percent tangible property standard; and
• They allow a QOZB to treat equipment, buildings, and other tangible property that is being improved with the working capital as QOZBP that is “used in a trade or business” for purposes of the requirement that a QOZB must be engaged in a trade or business.
• In addition, the final regulations provide that a QOZB not utilizing the working capital safe harbor may treat tangible property undergoing the substantial improvement process as being used in a trade or business.

Hanson Bridgett is still reviewing these new regulations and will provide a comprehensive update soon.  Interested taxpayers or their representatives should contact Christopher Karachale or Daren Shaver at Hanson Bridgett with any questions.