The federal Opportunity Zone (OZ) program is intended to be a powerful tool to unlock private capital for investment in distressed areas. Although Treasury and the IRS have released proposed regulations and a frequently asked questions page, some uncertainties remain regarding implementation of the new program, including potential state tax implications associated with the investments. For instance, investors should consider additional the availability of additional economic incentives from local and state governments since OZs are designated by governors to be areas in economic distress. Also, state income tax implications may present additional opportunity, as well as complexity, to the ultimate benefits sought on investing.
Federal, state, and local incentives, as well as state income tax implications, may play a key role in analyzing the overall tax benefits associated with QOFs. Based on the complexity of each state’s adoption of the IRC and the potential for variable treatment among states, taxpayers should model the potential state income tax consequences of any QOF investment to determine the net tax benefit.