States Must Act Now on Opportunity Zone Tax Incentives That Target Low-Income Communities

by Ballard Spahr LLP

Ballard Spahr LLP

The IRS and the Community Development Financial Institutions Fund (CDFI Fund) simultaneously released guidance yesterday on the procedure for designating population census tracts as Qualified Opportunity Zones (QOZ). States must act quickly if they want to designate any QOZs, which will be eligible for federal tax incentives designed to encourage new capital investment in those areas.

The ability to designate QOZs was provided to States—which in this case also includes the District of Columbia and U.S. possessions—by The Tax Cuts and Jobs Act—enacted on December 22, 2017. In fact, the only formal role of a State in this process would be to submit its nomination of census tracts to be designated as a QOZ to the Secretary of the U.S. Department of the Treasury by March 21, 2018.

IRS Revenue Procedure 2018-13 provides a “safe harbor” for States that rely on the CDFI Fund’s Opportunity Zone Information Resource, which identifies more than 41,000 population census tracts that are eligible for designation as QOZs. The Revenue Procedure also promises further information on the nomination process in coming weeks, including how States can access Treasury’s online Nomination Tool for QOZs and how to request a 30-day extension of the nomination period, from March 21 to April 20, 2018. In the period before the submission deadline, a State can review the requirements for designation and compile its list for timely submission. (The CDFI Fund’s information resource is available here.)

The federal tax benefit will flow to investors in a so-called "Qualified Opportunity Fund." The incentive is designed to encourage investors to roll over certain realized gain on prior non-zone investments into investments in QOZs. An investor is able to temporarily defer and, in some cases, permanently exclude gain rolled over and used by the Qualified Opportunity Fund for the purchase of stock, or a partnership interest, in qualifying businesses and qualified tangible property acquired, constructed, or substantially improved. Only investors in Qualified Zone Funds who roll over capital gains of non-zone assets into qualifying assets before December 31, 2026 will be able to take advantage of these provisions. The partial or permanent relief applies to interests in Qualified Opportunity Funds held for five to 10 years.

The Opportunity Zone tax incentives build on combinations of incentives provided under the New Markets Tax Credit (NMTC) program and prior federally designated enterprise zones and renewal communities. Many of the specifics will need to be clarified by the IRS, but it is critical that States act soon to nominate their QOZs.


Congress established a powerful new tax incentive in The Tax Cuts and Jobs Act that will help States revitalize struggling areas that have been left behind by the slow national economic recovery since 2008. The Qualified Opportunity Zone program provides capital gains deferral and relief to long-term investors in economically distressed areas designated by the Chief Executive Officer (CEO) of those States, which again also includes the District of Columbia and U.S. possessions.

Each State's CEO must nominate a limited number of population census tracts to be designated as QOZs by March 21, 2018, unless the CEO requests and receives a 30-day extension of this deadline until April 20, 2018 from Treasury. New sections 1400Z-1 and 1400Z-2 of the Internal Revenue Code allow each State to nominate at least 25 census tracts as QOZs or, if greater, 25% of the total number of "low-income communities" (LICs) in the State. To qualify, however, the CEO of each State must submit written notice of its QOZ nominations to the Treasury Secretary.

The guidance published by the IRS yesterday clarifies key procedural aspects of the designation process and promises to provide additional information regarding an online system to be used by State CEOs to identify and nominate QOZs from more than 41,000 eligible census tracts and also to request the 30-day extension.

This alert outlines the basic rules for designation of QOZs and explains how States can use the program to target local communities suffering from a lack of access to capital and new business development. Attorneys in Ballard Spahr's Public Finance Department and Tax Group have extensive experience working with state and local governments on tax incentive programs for economically distressed areas and can assist governments seeking to tap into this valuable new program.

What is the process for becoming a Qualified Opportunity Zone QOZ?

  • The Tax Cuts and Jobs Act authorizes any "State" to "nominate" a limited number of LIC census tracts, including certain contiguous tracts that are not LICs, for designation by the Treasury Secretary as a QOZ.

  • The CEO of each State nominates QOZs by notifying the Treasury Secretary of its nominations using an online Nomination Tool that will be made available in the coming weeks to State CEOs.

    • Governors of U.S. states and possessions are their CEOs. The CEO of the District of Columbia is the District’s Mayor. March 21, 2018 is the statutory deadline for State CEOs to nominate census tracts for designations as QOZs, although the CEO can request a 30-day extension of this deadline to April 20, 2018.

    • Further information on how to access the online Nomination Tool for designating QOZs and how to request an extension of the statutory nomination period will be sent individually to all State CEOs.

  • Maximum Number of Tracts that can be nominated by a State as QOZs is equal to the greater of (1) 25% of the number of all LICs in the State or (2) 25 (regardless of the number of LICs in the State).

    • At least 95% of the tracts that are nominated by a State as QOZs must be LIC census tracts.

    • Up to 5% of the total number of QOZs nominated by a State may be tracts that are not LICs but are contiguous with an LIC tract (Non-LIC Contiguous Tracts).

      • The contiguous LIC tract upon which a Non-LIC Contiguous Tract’s eligibility is based and the Non-LIC Contiguous Tract need not be located in the same State.

      • State CEO’s involved in Cross-State nominations of Non-LIC tracts based on being contiguous with an LIC in another State will need to coordinate to confirm that the contiguous LIC has been nominated.

    • Revenue Procedure 2018-13 provides (1) that the total number of tracts that may be nominated by a State is rounded up to the next whole number if the number of LICs in the State is not evenly divisible by 4, and (2) that the number of Non-LIC Contiguous Tracts is rounded up to the next whole number if the number of designated QOZs in the State is not evenly divisible by 20.

    • Example for Quantitative Limits on QOZs: State X has 198 LICs. The maximum number of QOZ designations by the State is 50, even though 25% of the State’s 198 LICs is 49.5. Assuming State X nominates all 50 of the QOZs allowed, then three nominated tracts may be Non-LIC Contiguous Tracts (5% of 50 QOZs or 2.5, rounded up to 3). State X could nominate 50 QOZs (25.3% of statewide LICs), including 47 QOZs that are LICs (94% of statewide QOZs), with three Non-LIC Contiguous Tracts of such QOZs (6% of statewide QOZs) without running afoul of either the 25% limit on the number of QOZs or the 5% limit on the number of QOZs that may be Non-LIC Contiguous Tracts.

  • LIC is defined for purposes of the numerical limits on QOZs and Non-LIC Contiguous Tracts in a similar manner to NMTC under Section 45D(e)(1) of the Internal Revenue Code to mean any population census tract if (1) the poverty rate of the tract is at least 20%, or (2) the median family income for the tract does not exceed 80% of statewide median income, or in the case of a metropolitan census tract, 80% of the metropolitan area median family income if greater than the statewide median.

  • Census tracts that are not LICs may be designated if they are (1) contiguous to designated QOZ and (2) median family income of tract does not exceed 125% of median family income of contiguous tract that is an LIC (with a limit of up to 5% of QOZ designations allocable to such tracts) (Eligible Non-LIC Contiguous Tracts).

  • The CDFI Fund has developed an online Information Resource (, which State CEOs may rely on under a “safe harbor” established by Revenue Procedure 2018-13 to determine:

    • The total number of LIC tracts in each State

    • The maximum number of census tracts that each State may nominate as QOZs

    • The maximum number of Eligible Non-LIC Contiguous Tracts that each State can include in its QOZ nominations

    • Whether a census tract within a State is either (a) an eligible LIC that may be nominated as a QOZ or (b) an Eligible Non-LIC Contiguous Tract that may be included in the nomination of one or more LIC tracts on whose designation as a QOZ the non-LIC tract’s eligibility depends

    • Under the Revenue Procedure’s Safe Harbor, if the CDFI Fund’s Information Resource identifies a census tract as being a tract eligible for nomination as a QOZ, a State CEO’s nomination of that tract will not fail to be certified on the grounds that the tract is no longer eligible under more recent census data

    • If a State CEO chooses not to use the CDFI Fund’s Information Resource, the CEO must provide an analysis demonstrating that eligibility, including more recent Census Bureau data

    • The CDFI Fund's complete list of all eligible tracts is available here:

  • The CDFI Fund's Information Resource lists a total of 41,133 population census tracts that are eligible for designation as a QOZ.

    • 31,680 population census tracts are LICs eligible for designation as QOZs

    • 9,453 non-LIC population census tracts are eligible for designation if a particular LIC contiguous to the non-LIC tract is designated as a QOZ

    • Based on the CDFI Fund’s Information Resource, 43 States (including Puerto Rico) will be eligible to nominate more than 25 census tracts as QOZs and 14 States (including four U.S. possessions and the District of Columbia) will be limited to 25 nominations

    • Timely notice by State CEO of QOZ nominations via Treasury’s online Nomination Tool starts Treasury’s clock for designating the QOZ.

    • Treasury has 30 days after receiving notice from a State to certify the nominations and designate census tracts as QOZs, although a State can request a 30-day extension.

    • For States that notify Treasury of their QOZ nominations on the statutory deadline of March 21, 2018, Treasury would have until April 19, 2018 to designate the QOZs, unless the State CEO elects the option of the 30-day extension. States that notify Treasury of their QOZ nominations on the extended deadline of April 20, 2018, will have until May 21, 2018 (the next succeeding day that is not a weekend after Saturday, May 19, 2018), unless the May 19 deadline is extended at the State CEO's option for another 30 days to June 18, 2018.

    • June 18, 2018, is the last possible for date for QOZ designation to be made by Treasury.

  • Designation as QOZ begins on the date of designation and continues through the close of the tenth calendar year beginning on or after the designation date, which in all cases will be December 31, 2028. Thus, QOZs will continue to derive economic advantages from Opportunity Zone tax incentives for at least 10.5 years.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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