As part of the passing of the Tax Cuts and Jobs Act in December 2017, a new tax incentive was created for investing in certain economically distressed areas designated as Qualified Opportunity Zones (QOZ). From the outset of the program, New Jersey politicians have been very supportive of the program expecting it to create economic growth in many of the distressed areas of the state. One question which had remained unanswered is if New Jersey would adopt the Federal tax incentives to further encourage investment in New Jersey’s QOZ’s. While New Jersey did not pass legislation to adopt the QOZ tax benefits, the Division of Taxation has provided welcome guidance to QOZ investors.
Taxpayers who have recognized capital gains are afforded a number of Federal tax benefits for investing in a qualified opportunity fund (QOF) which would invest in QOZ businesses or directly acquire qualifying business assets. The tax which would be due on any capital gains would be reinvested into a QOF that is deferred until December 31, 2026. Additionally, the taxpayers would receive a basis increase to exclude a portion of the gain if they hold the investment for 5 years (10%) or 7 years (15%) between the time of investment and December 31, 2026. On top of this initial capital gain deferral/exclusion, taxpayers who hold the QOF investment for at least 10 years are eligible to make an election to step up their basis in the investment to its fair market value. This election is designed to allow taxpayers to exclude the future appreciation of the QOF investment from taxation. To take advantage of QOZ incentives, a taxpayer must adhere to certain timelines and other requirements of the program.
New Jersey’s Division of Taxation has now provided favorable guidance to comply with the Federal tax incentives for purposes of New Jersey taxation. For gross income tax purposes, the deferral of capital gains and 10/15 percent exclusions will be followed as the method of accounting and the basis in property must be the same as for Federal income tax purposes. The taxable gain will be recognized when it is recognized for Federal tax purposes. Additionally, the election to increase the basis for investments held at least 10 years resulting in the exclusion of gain from the future appreciation of the investment will be followed for New Jersey tax purposes.
For corporate business tax purposes, the Division of Taxation also concluded that the tax incentives provided for QOZ investments will be followed. They indicated that this is due to the fact that New Jersey follows the same method of accounting for Federal purposes and the State’s starting point for taxable income is the entity’s Federal taxable income.
This guidance has provided potential QOZ investors the tax treatment they were hoping for and is consistent with the support of the QOZ program New Jersey legislators have exhibited.
Please contact our offices if you have any questions regarding qualified opportunity zone investments.
