QOZ Updates & New York’s Move to Decouple from QOZ Tax Benefits

by | Apr 22, 2021 | Blog, Opportunity Zones | 0 comments

QOZ Updates & New York’s Move to Decouple from QOZ Tax Benefits
QOZ Updates & New York’s Move to Decouple from QOZ Tax Benefits

On Wednesday, April 21, 2021, Jim Tankersley published this New York Times article, “Biden Administration Debating How to Overhaul a Trump-Era Tax Break.” Administration officials interviewed for the story specifically noted their interest in efforts to increase transparency and affordable housing investments in QOZs.

“The Biden administration right now could institute reforms and make this program work a lot better for communities,” said Brett Theodos, director of the Community Development Economic Hub at the Urban Institute in Washington.

While campaigning for president, Mr. Biden promised to improve the QOZs, seeing that as a way to bring about more economic equity. Among his promises was to require detailed new disclosure by investors in the QOZs in order to better track their effects on the distressed communities they are meant to help.

The Treasury has already issued one regulation governing the zones, and more are on the way. Still, the program has not yet risen to the top of the president’s tax agenda, administration officials say, given the other priorities that the White House is trying to push through Congress, including a $2.3 trillion infrastructure package.

Additionally, on Monday, Governor Cuomo signed New York’s 2022 fiscal budget, which, as expected, decoupled the state tax code from the federal QOZ tax benefit. Importantly, the budget includes provisions to decouple from QOZ deferral and reduction benefits, but not exclusion benefits. Please find below a summary of the changes, and additional analysis from different voices in the QOZ space. 

Here is a summary of the NY decoupling:

The decoupling is effective for taxable years beginning on or after January 1, 2021.

  • That means any gains that would otherwise be included in income in 2020 are still eligible for the deferral and reduction benefits in New York, even if those gains have not yet been invested in a Qualified Opportunity Fund (QOF).
    • When those gains become subject to federal income tax in 2026 (or on an earlier Inclusion Date), they will be excluded from the New York tax base so that New York only taxes those gains once.
  • 2021 gains invested in a QOF between January 1, 2021 and the enactment date of the bill are not eligible for the deferral and reduction benefits.

New York has not decoupled from the 10 year exclusion benefit. It's unclear if that was the state's intent.

  • This means gains from the sale of a QOF interest (or applicable asset sale) may still be eligible for exclusion from income for both federal and New York income tax purposes. 

The addback and exclusion regime for calculating New York taxable income does avoid double taxation for taxpayers that are subject to tax in New York both in the year of the gain and the year of the Inclusion Date.

  • This does not prevent double state taxation for a New York taxpayer that is subject to tax as a resident in an OZ-conforming state on the Inclusion Date.

Below is a list of additional resources:

Please contact us to learn more.