If you are an Operating Qualified Opportunity Zone Business, you need to keep track of the five asset tests. Referencing our handy dandy Opportunity Zone Cheat Sheet, you have to start with a capital gain that goes into a Qualified Opportunity Fund within 180 days. Next you need to drop that cash down into a QOZB and then that hits your 90% test. Once the money is in the QOZB, these are the five tests that have to be complied with. We have them broken out in better detail below.
The first test is that 70% of your tangible assets must be Qualified Opportunity Zone Business Property. With that being said, how are you keeping track of the fact that it is either new or substantially improved property? What is in your audit trail? The great thing about the Opportunity Zone program is that you do not have to ask permission from anyone. However, what you have to do is prove the stance that you take. So it’s all about the audit trail. A detailed audit trail is the key thing that you will need to have. You must also keep good records showing that you have substantially improved the property. If you have bad assets, you need to keep track of those bad assets, what you are doing about them, and that you have sufficiently documented where they came from. If they are new assets, make sure you save your receipts.
The second test is that 50% of your gross income must come from a trade or business that is happening inside of the Opportunity Zone.This is tested by any one of the following four ways. First, at least 50% of your total compensation must be paid to employees and independent contractors working in the Opportunity Zone, total hours worked must be at least 50% in the zone, or that your tangible property and management home runs to the zone. This means that you regularly use the Opportunity Zone office in the course of carrying out your duties, and they are managed actively, daily, directly and substantially on a day-to-day basis by somebody who is working in the Opportunity Zone.
You may ask yourself, “how do I keep track of this?” And the best answer is you get them all ankle bracelets. So that you put timekeeping, GPS locators on them. Then you can print out a report that shows at least 50% of their time was in an Opportunity Zone. Now, we say that tongue in cheek, because we all know that that is not going to happen. We know that they are probably not going to be okay with a timekeeping app either. So a baseline is that you will need some kind of certification that employees and independent contractors are working 50% in the Opportunity Zone. Schedule a strategy call with me so that we can give you the certification that you can use in order to keep track of this test.
The third test is that at least 40% of your intangible property is utilized within the trade or business happening in the Opportunity Zone. This test is actually pretty easy to meet because if you are doing something in the zone that is active daily and you are not just an IP troll that is in the zone, we think you are going to be okay. Just remember, you need to be cognizant about it and you need to make sure that you are testing it every June 30th and December 31st.
The fourth test is that you cannot have more than 5% non-qualified financial property. You also need to have your bank statements from June 30th and from December 31st that show how much cash you had in the bank account, what your actual physical assets, and proof that you had invested in the zone at that point in time. It is crucial to have all of that information within your audit trail.
The fifth test is that you cannot be a sin business. You have to prove that you’re not a golf course, hot tub facility, or spa. Now, one thing to be concerned about is if you are a distillery or a brewery, and you’re doing packaged sales. You need to make sure that you’re cognizant of that. If you fit this description, schedule a Strategy Call with us. We will point you in the right direction. We’ve got experts who are excellent at helping with exactly that.
Now that you know what not to do, let’s help you find out what actually to do on the front end. That way we’re not trying to undo what you’ve already done. The best way to do that is scheduling a Strategy Call, jumping on the OZ Pros Compliance Bootcamp, or downloading the Opportunity Zone Cheat Sheet today. It’s important to make sure that your professionals have the OZ Cheat Sheet in hand, you’re complying with these five tests, and keeping great records associated with it. We look forward to helping you do your Opportunity Zone transaction correctly.