New Systems for Small Business Capital Campaigns
As the federal government and state governments deal with the Coronavirus (COVID-19) Pandemic, work is underway to address the economic disaster now starting. In a need for speed, government disaster relief programs are turning to existing institutions and programs to race money to small businesses. One of the tools already in the economic development toolbox that can be applied to recovery efforts is Opportunity Zone investing.
The Tax Cuts and Jobs Act passed in December of 2017 authorized tax incentives for investments into businesses and properties located within designated geographic areas – Opportunity Zones. 8,762 Opportunity Zones have been certified in each of the fifty States and United States territories. A national map of Opportunity Zones and the history of the legislation may be obtained from the Economic Innovation Group at: https://eig.org/opportunityzones. The incentives are intended to generate jobs and aid the local economies by influencing investors to provide capital to distressed economic communities. Investors who roll over their capital gains into Opportunity Zone projects may receive a deferral of taxes, a reduction of those taxes and, if the investor leaves their investment in the project for 10 years or more, all gains on the Opportunity Zone Fund investment are tax free.
After two years of extensive public discussion, the Internal Revenue Service released the final regulations for this powerful economic program in December 2019. Opportunity Zone investing is aimed, locked and loaded to play a significant role in recovery of the United States economy.
The Opportunity Zone program is positioned to invest substantial private money into Opportunity Zone businesses and property developments right away. The program was structured to deploy investments quickly. An investor, individual or business, is required to complete an investment into an Opportunity Zone project within 6 months after recognizing their capital gain. Many investors recognized their capital gain on December 31, 2019 when their ownership in a pass-through tax entity – limited liability company or partnership – formally closed their books. This money must be re-invested by June 30, 2020 to qualify for Opportunity Zone benefits – just three months away. In addition, investors began fleeing Wall Street beginning on February 20, 2020 as the stock market peaked before record sell offs. The total market capitalization of U.S. stock market on December 31, 2019 was $37,689,255.8 million up from when the market bottomed in the Great Recession with capitalization of $11,461,287.6 million on December 31, 2008. https://siblisresearch.com/data/us-stock-market-value/ Most investors selling stock after February 20 realized capital gains. The six-month stopwatch on the Opportunity Zone program requires these investors to complete an Opportunity Zone investment starting on August 20 and continuing through October 1, 2020. This represents trillions of private capital gains dollars.
Governments, by themselves, cannot pump enough money into the economy. Private money is also needed. Money invested in Opportunity Zone projects will greatly increase the amount of money available for economic recovery.
Opportunity Zones represented the parts of our country where investment was needed most pre-Pandemic. Everything is being impacted by the Pandemic, but it is likely that Opportunity Zones will continue to include communities that need the most help.
There will be much debate about where government dollars should be directed towards economic recovery. As was seen during the Great Recession, money should be directed into ‘shovel ready’ projects that have the greatest and quickest impact – generating jobs from production and sale of products and services. Placement of this money will become an activity of picking winners and losers. The government will benefit from matching public money with private money where investment opportunities are selected by the private sector. The Opportunity Zone program has safeguards built into it to prioritize investments in distressed communities over investments with only profits in mind.
While considering all options for economic recovery, the federal government and state governments should consider the following enhancements to the Opportunity Zone program:
Other analysis of the Opportunity Zone program by tax experts, community leaders and small business owners will offer additional options to enhance the Opportunity Zone program in its own right and as a tool in economic recovery.
Karl Dakin, Executive Director and Economic First Responder
Capital Innovation & Technology Institute LLC
Karl Dakin is the author of the Small Business Pandemic Survival Kit which is now available through Knowledge Avatars at https://knowledgeavatars.com/small_bz_pandemic_survival_kit.
Karl Dakin is also the host of Opportunity Zones Meetup – a working group to apply shared knowledge on Opportunity Zones best practices. https://www.meetup.com/Opportunity-Zones/