You never change things by
fighting the existing reality. To change something, build a new
model that makes the existing model obsolete.
-R. Buckminster
Fuller (1982)
I. Introduction
Since this country's inception, federal economic development programs have been fundamental and innovative tools to incentivize both public and private sector investment in distressed areas. In particular, economic development programs offer the prospect of maximized profits (or the prospect of some profit in the case of less-profitable/riskier investments) for wealthy and entity investors, as most allow tax credits that reduce the current-year tax base dollar-for-dollar, tax deferral (resulting in less current-year tax owed), or additional sources of funding.
Each economic development program is implemented for different reasons, using unique methodologies to target different segments of the market. For example, the Low-Income Housing Tax Credit program was adopted as a means to tackle the affordable housing crisis, while the Energy Tax Credit program was adopted to incentivize companies to shift to renewable green energy. Meanwhile, within the Opportunity Zones Incentive (OZ Incentive)1 -the newest economic development innovation found within the Tax Cuts and Jobs Act (TCJA)2 -the federal government has established a broader program that incentivizes place-based economic development, allowing investments in a far wider range of businesses, property, and joint ventures than other programs in years past. This less restrictive structure of the OZ Incentive provides overlap with many other programs' market coverage, giving investors a unique opportunity to engage innovative tax planning techniques: entering into complex ventures to take advantage of the benefits of more than one program. I refer to this coupling process as "twinning."
The OZ Incentive and other programs found within the tax code have varying levels of synergy and can twin, but oftentimes imperfectly, since the objectives of each program-while in similar "economic development" veins-can vary depending on the particular investment and program requirements. While the increased cost and compliance in dealing with multiple tax-credit programs at once can be off-putting to some investors, the lucrativeness of twinning could still win the day. Particularly if the cost of administration is compared to the alternative heightened tax burden, a figure that can only increase with the Biden administration's proposed capital gains rate increases this fall.3 Within this article, I discuss possible OZ twinning structures, their pitfalls when twinned with other programs, and policy changes that could make the twinning process more streamlined.
This article proceeds in six parts. Part II discusses the history and objectives of the OZ Incentive and provides a general overview of the program, highlighting relevant provisions for purposes of this article. Part III discusses the objectives of the Low-Income Housing Tax Credit program in general, subsequently giving a brief overview of its structure and discussing possible twinning structures with the OZ Incentive. Part IV discusses the objectives of the New Markets Tax Credit program, subsequently giving a brief overview its structure and similarly discussing possible twinning structures with the OZ Incentive, as in Part III. Part V briefly highlights the potential for tripling and quadrupling of OZs with various other incentives, although that cannot be addressed at length in this article. Finally, Part VI concludes with a brief discussion of balancing the risks and benefits associated with the innovative twinning process.
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Footnotes
1. See generally I.R.C. §§ 1400Z-1, 1400Z-2 (2021).
2. Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, 131 Stat. 2054 (2017).
3. On September 13, 2021, the House Ways and Means Committee released its recommended budget reconciliation measures, proposing a new wave of tax code changes that could affect every investor. See House Ways & Means Committee, Committee Print Consisting of Subtitles F, G, H, and J, Budget Reconciliation Legislative Recommendations Relating to Infrastructure Financing, Green Energy, Social Safety Net, and Prescription Drug Pricing (Sept. 13, 2021) [hereinafter Reconciliation Proposal].
Of note, the reconciliation measure proposes an increased capital gains rate of twentyfive percent.
Originally published by American Bar Association's Journal of Affordable Housing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
