A panel of legal and business experts on Wednesday (Feb. 6) provided an in-depth overview of the new federal Opportunity Zone rules that local and state economic officials hope will boost poor and distressed communities across the state.
The discussion on the new federal program, which was inserted in the omnibus $1.8 trillion Tax Cut and Jobs Act passed by Congress in December 2017, was part of the agenda at the three-day annual meeting of the Delta Regional Authority held at the downtown Marriott Hotel in Little Rock and occurred just as the Arkansas Senate passed a bill in support of the program.
Under the 2017 tax cut plan approved by Congress, President Donald Trump’s administration strongly backed a new Department of Treasury and Internal Revenue Service program establishing qualified Opportunity Zones to spur investment in distressed communities across the country through a new federal capital gains tax incentive.
After beginning the panel session with a video message from U.S. Sen. Tim Scott, R-South Carolina, the chief sponsor of the new federal program, local attorney Scott Lar with Quattlebaum, Grooms and Tull said states are still awaiting some guidelines and modifications related to enabling legislation from the Treasury Department.
“Like most of the Tax Cut and Jobs Act, this piece of legislation is still subject to technical corrections, which we may or may not ever get,” said the Little Rock attorney. “We are awaiting clarification on a few issues and some additional guidance. We do have one round of initial guidance and we will talk through that …”
According to U.S. Treasury officials, the new federal incentive program will allow private investors to defer payment of taxes on capital gains on profits they earn on investments in the certified zones. They must invest the money through a corporation or partnership that was organized for that specific purpose.
Under the rules, the investor’s fund must hold at least 90% of its assets in qualifying property. Nearly a year ago, governors from all 50 states could nominate up to 25% of eligible areas by March 21, 2018 as designated zones in their respective locales, based on census tract data. In May, Arkansas Gov. Asa Hutchinson received word that the U.S. Treasury had approved his nominations for 85 such zones in Arkansas.
Bryan Scroggins, director of business finance at the Arkansas Economic Development Commission, told the DRA panel that Arkansas selected 85 zones out of 337 qualified tracts. He told a roomful of DRA attendees that the state’s nominations were based on the potential to attract investment and the likelihood of economic success.
After Hutchinson announced the qualified opportunity zones in Arkansas in May, AEDC Director Mike Preston said he would work closely with communities to find the right investment opportunities. Another panelist at the DRA conference, Arkansas Capital Executive Vice President Leslie Lane said each state and each community will have to figure what projects will work best to bring new investment and economic developed projects in distressed rural and urban communities across Arkansas.
“There is not a cookie-cutter way that every state is trying to address this (program),” said Lane.
As of today, the U.S. Treasury has already designed Opportunity Zones in 18 states. Those chosen as “qualified opportunity zones” will retain that designation for a decade. Investors can defer tax on any prior gains until no later than Dec. 31, 2026, so long as the gain is reinvested in a so-called Qualified Opportunity Fund investment vehicle that targets the designation distressed areas.
In addition, if investors hold the investment in the fund for at least ten years, they would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold. Unbeknownst to the DRA panelists, which also included Quattlebaum attorney Kenneth Hall and Arkansas Venture Center Chairman James Hendren, the Arkansas Senate passed a bill about an hour before the discussion began that opens the door for Arkansas to be certified under the federal program.
Senate Bill 196 by Sen. Keith Ingram, D-West Memphis, was unanimously approved by a 35-0 vote after several senators praised the federal program as a way to bring investment to Arkansas, noting that the bicameral Tax Reform and Relief Task Force endorsed the program. On the Senate floor, Ingram called the Opportunity Zones the best thing to come out of the $1.8 trillion 2017 Tax Cut Act that lowered the corporate tax rate from 35% to 21%.
“It makes it very attractive for businesses to come in a (distressed) census area,” Ingram said. SB196 is now referred to the House Revenue & Taxation Committee, where is also expected to get a friendly reception. Gov. Hutchinson and AEDC have also expressed their support for the legislation.
The DRA is a federal-state partnership created by Congress in 2000 to help create jobs, build communities, and improve lives through strategic investments in economic development and infrastructure projects in 252 counties and parishes across eight Delta states, including Arkansas. The authority’s three-day annual meeting in Little Rock, which included a reception at the Arkansas Governor’s Mansion, ends on Thursday.