If you’re selling a business interest, real estate or other highly appreciated property, you could get hit with a substantial capital gains tax bill. One way to soften the blow—if you’re willing to tie up the funds long term—is to “roll over” the gain into a qualified opportunity fund (QOF).

What Is a QOF?

A QOF is an investment fund, organized as a corporation or partnership, designed to invest in one or more Qualified Opportunity Zones (QOZs). A QOZ is a distressed area that meets certain low-income criteria, as designated by the U.S. Treasury Department.

Currently, there are more than 9,000 QOZs in the United States and its territories. QOFs can be structured as multi-investor funds or as single-investor funds established by an individual or business. To qualify for tax benefits, at least 90 percent of a QOF’s funds must be “QOZ property,” which includes:

QOZ Business Property

This is tangible property that’s used by a trade or business within a QOZ and that meets certain other requirements.

QOZ Stock or Partnership Interests

These are equity interests in corporations or partnerships, with substantially all* their assets in QOZ property.

*Note: Final regulations define “substantially all” to mean at least 70 percent.

What Are the Benefits?

If you recognize capital gain by selling or exchanging property, and reinvest an amount up to the amount of gain in a QOF within 180 days, you’ll enjoy several tax benefits.

Taxes will be deferred on the reinvested gain until the earlier of Dec. 31, 2026, or the date you dispose of your QOF investment. There will be a permanent reduction of the taxability of your gain by 10 if you hold the QOF investment for at least five years, and an additional 5 percent if you hold it for at least seven years. If you hold it for at least 10 years, you’ll incur tax-free capital gains attributable to appreciation of the QOF investment itself.

The only way to obtain these benefits is to first sell or exchange a capital asset in a transaction that results in gain recognition. You then would reinvest some or all of the gain in a QOF. You can’t simply invest cash.

You or your heirs eventually will be liable for taxes on some or all of the original gain. Consider ways to avoid those taxes, such as holding the original property for life or doing a tax-free exchange.

IRS Addresses QOFs in 2020 Guidance

In February 2020, the IRS issued guidance on reporting gains from QOFs. It gives instructions on how to report the deferral of eligible gains from Section 1231 property and the inclusion of those gains when the QOF investment is sold or exchanged.

Taxpayers who defer eligible gains from such property, including gains from installment sales and like-kind exchanges, by investing in a QOF must report the deferral election on Form 8949, “Sales and Other Dispositions of Capital Assets,” in the deferral tax year. And taxpayers selling or exchanging a QOF investment must report the inclusion of the eligible gain on the form.

Who Can Help?

The rules surrounding these QOFs are complex. We can help you further explore the idea.

Under IRS guidance, eligible employers who pay qualifying sick or childcare leave under the Families First Coronavirus Response Act (FFCRA) will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and childcare leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and childcare leave paid, employers will be able to file a request for an accelerated payment from the IRS using Form 7200. The IRS expects to process these requests in two weeks or less.

We have developed an FFCRA Calculator to help you determine the 941 payroll tax credit and/or advance from the IRS (Form 7200). This calculator will assist you in keeping your documentation organized by employee.

Using QuickBooks to Pay FFCRA Leave?

Until QuickBooks has the function working on the back-end, use these instructions as a workaround for paying FFCRA leave in QuickBooks.

Pandemic Unemployment Assistance

Pandemic Unemployment Assistance (PUA) is a new temporary federal program that provides up to 39 weeks of unemployment benefits to individuals who are not eligible for regular Unemployment Insurance (UI), such as self-employed individuals and certain independent contractors.

Contact your state's unemployment insurance office to learn more about eligibility.

Most Americans aren’t using their passports right now. But it’s still important to remember that, if the IRS certifies that you have a seriously delinquent tax debt (SDTD), your passport application could be denied, or your current passport could be limited or revoked.

You have an SDTD if:

Should you find yourself in this situation, there are several steps to take to avoid losing your passport. First, obviously, you can pay your tax debt in full immediately. If that’s not possible, you may be able to pay your debt on a timely basis according to an approved installment agreement, accepted offer in compromise or settlement agreement with the Justice Department.

Requesting a collection due process hearing regarding a levy, or having collection suspended through a request for innocent spouse relief, may also enable you to retain your passport. More important, the IRS won’t likely notify the U.S. State Department of an SDTD during a federally declared disaster, such as the one we’ve experienced this year, or in the case of bankruptcy, identity theft or other hardships. Contact us for more info.