Qualified Opportunity Zone Business

A qualified opportunity zone business (QOZB) is an operating business or property-holding entity that meets the requirements of Section 1400Z-2 of the tax code and into which a Qualified Opportunity Fund (QOF) invests. Rather than holding qualified property directly, most QOFs invest through one or more QOZB subsidiaries, the "two-tier" structure, because the QOZB rules offer important operating flexibility. To qualify, a QOZB must, among other tests, derive at least 50% of its gross income from the active conduct of a trade or business within the opportunity zone, hold a substantial portion (at least 70%) of its tangible property as qualified opportunity zone business property, keep less than 5% of its assets in nonqualified financial property (subject to a working-capital safe harbor), and not be a "sin business" such as a golf course, country club, massage parlor, racetrack, or liquor store. A key advantage of the QOZB structure is the working-capital safe harbor, which allows the business up to 31 months (and in some cases longer) to deploy cash under a written plan for the acquisition, construction, or improvement of property in the zone, giving real estate development projects time to spend funds without failing the asset tests. The QOZB rules are technical and were detailed in Treasury regulations finalized in 2019; investors should rely on the fund's offering documents and qualified tax counsel.