The Treasury Department on Friday released proposed rules about the “opportunity zone” program created by President Trump’s tax law, which is designed to help spur new investments in distressed communities.
The guidance is designed to provide investors with information needed to enter into business arrangements in the opportunity zones, Treasury said. Investors and state and local governments who plan to utilize the program had been looking forward to receiving guidance on the program.
Under the new tax law, investors can receive capital gains tax breaks if they invest in distressed areas designated by Treasury as opportunity zones. Treasury has already approved areas that governors requested be designated as opportunity zones. More than 8,000 communities, home to almost 35 million Americans, are in the designated areas.
The tax law allows for a deferral of taxes until 2026 for capital gains from other investments that are reinvested in funds that invest in opportunity zones. It also exempts from taxes capital gains on investments in opportunity zones that are held for 10 years.
The opportunity zone program was a top priority of Sen. Tim Scott (R-S.C.) during the process of moving the tax bill through Congress.
Treasury Secretary Steven Mnuchin has also been enthusiastic about the program. At an event hosted by The Hill last month, he predicted that more than $100 billion in private capital would be invested in the zones.
“This incentive will foster economic revitalization and promote sustainable economic growth, which was a major goal of the Tax Cuts and Jobs Act,” Mnuchin said in a news release Friday.
The guidance provides information about what gains qualify for deferral of taxes, who can invest in opportunity zone funds and parameters of the investments made by the funds.
A senior Treasury official said that the rules provide flexibility about what taxpayers can invest in funds and includes a favorable definition of what it means for a business to invest “substantially all” of its assets in property in opportunity zones.
The official said that the department expects to release an additional set of proposed rules on opportunity zones by the end of the year, focused on continuing operations of opportunity-zone funds. The official expects proposed rules to be finalized early next year.
Prior to this year, tax rules were generally exempt from review by the Office of Management and Budget (OMB). But Treasury and the OMB issued a memo in April that directs the OMB to review certain tax rules. Under the memo, rules relating the new tax law are supposed to be reviewed within 10 business days, subject to extensions.
The OMB received the opportunity-zone guidance from Treasury on Sept. 12 but did not finish its review until Oct. 17.
The New York Times reported that Treasury and the OMB sparred over the strictness of the opportunity zone rules, with some at Treasury pushing for rules that others thought would be too limiting.
The senior Treasury official said that both Treasury and the OMB wanted to be careful about the rules because the opportunity zone program has the potential to have a big economic impact. The official said the review process worked well and was “collegial and collaborative.”