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New OZ Regulations Clarify 50% Gross Income Test for OZ Businesses New OZ Regulations Clarify 50% Gross Income Test for OZ Businesses

New OZ Regulations Clarify 50% Gross Income Test for OZ Businesses

The U.S. Department of Treasury (“Treasury”) and Internal Revenue Service (“IRS”) released its second tranche of proposed regulations related to Opportunity Zones (“OZ”) yesterday (available here). As we study the second tranche of proposed regulations, we will update you on aspects of those regulations that will significantly impact the activities of investors, fund managers, businesses, community leaders and advisors in the OZ space. We first want to bring your attention to the clarifications provided in the new regulations regarding the 50% gross income test imposed on OZ businesses.

The second tranche of OZ regulations provided guidance to OZ investors on how to comply with the requirement that an OZ business must derive 50% of its gross income from the active conduct of business in the qualified opportunity zone. OZ constituent parties were concerned that certain businesses (i.e., e-commerce) could not satisfy the 50% test as promulgated, since it would derive much of its gross income from sales occurring outside of the OZ. In response, Treasury provided three safe harbors that, if met, would satisfy the 50% gross income test:

  1. At least 50% of the services performed for the business by employees and independent contractors are performed within the OZ (based on hours worked);
  2. At least 50% of the services performed for the business by its employees and independent contractors are performed within the OZ (based on wages paid for such services); or
  3. 50% of the gross income comes from tangible property and management services within the zone.

If an OZ business cannot meet any of the three safe harbors, it can still satisfy the 50% gross income test by showing that, based on all of the applicable facts and circumstances, at least 50% of the gross income comes from the active conduct of a business within the zone. 

We anticipate that the safe harbors and facts and circumstances test will give OZ investors and funds the clarity they need to start investing in OZ businesses in earnest. Please contact the Ice Miller team with any questions you have with respect to the application of the 50% gross income test to OZ businesses or other OZ requirements.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

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