Number three on our list of the Top Ten Things Not To Do is: are you an existing business or a startup business? We’re going back to our handy dandy Opportunity Zone Cheat Sheet. Once again, you have to start with a capital gain. Next you drop the money into your Qualified Opportunity Fund within 180 days, and then to your Qualified Opportunity Zone Business. That is going to meet your 90% test.
Within your Qualified Opportunity Zone Business, you need to have a Working Capital Safe Harbor Business Plan. For a startup entity, the money must be spent within a specific timeframe. That can be extended out to 62 months if there is a substantial influx of equity or debt in month 31. So effectively for every tranche of capital that you get in, you have up to 31 months to spend that, up to a total of 62 months if you are a startup. Now, the question then becomes what is a startup? This is relevant because of how this can have implications relative to any kind of existing income that’s coming in off of the property.
If you acquire a business or you acquire an asset that has legacy leases generating income and you haven’t substantially improved that asset yet, you could be considered an existing business and that income could be considered non qualifying income. Keep in mind, 50% of your income needs to come from active conduct from an Opportunity Zone and from Opportunity Zone Property.
To reiterate, number three is make sure you know the difference between a startup and existing business for purposes of these two tests. If you have existing income, make sure that you deal with it correctly because it could be classified as bad income that you need to account for. We love helping people answer questions to this, either on Strategy Calls or at the OZPros Compliance Bootcamp. Sign up for either one today and we look forward to helping you do your Opportunity Zone transaction correctly.