Dominic M. Calabro, Guest columnist Published 10:49 a.m. CT Dec. 14, 2018
On Oct. 10, Hurricane Michael slammed ashore on Mexico Beach with devastating impact. The impact was not limited to the coast, as inland counties also felt the high-end Category 4 storm’s wrath.
Before leaving Florida for Georgia, the Carolinas, and Virginia, the hurricane killed at least 35 Floridians, knocked out power to 380,000 homes and businesses, and caused insured damages of $2.6 billion (and climbing). Florida’s agriculture industry, including cotton, peanut, and corn farms, suffered more than $150 million in damages and timber losses are estimated at $1.3 billion.
It will take years for many of the areas affected by the storm to fully recover. And many of the impacted places haven’t benefited from the economic recovery enjoyed by many parts of the state. Luckily, a new federal program could help with this recovery, as well as promoting economic development in communities for years to come.
The federal Tax Cuts and Jobs Act of 2017, signed into law last December, created a community development program called Opportunity Zones, which provides a vehicle to connect private capital to deserving communities across the nation. The program could help to spur economic growth in areas impacted by Hurricane Michael. The program provides an incentive to invest in these zones by providing a tax deferral on the sale of assets if those proceeds are invested in a Qualified Opportunity Fund (QOF). Taxes on these capital gains are deferred until December 2026. If held for five years, the deferred capital gains tax is reduced by 10 percent and after seven years it is reduced an additional 5 percent. If held for 10 years, any appreciation of the QOF is exempt from federal income taxes.
All investments in Opportunity Zones must be made through QOFs, which must be approved by the U.S. Department of the Treasury. They can be private or publicly-managed funds and are required to hold at least 90 percent of their assets in qualified opportunity zone businesses or business property.
Governors from all 50 states and 5 territories, as well as the Mayor of the District of Columbia, were invited to nominate up to 25 percent of the qualified low-income census tracts in their states as Opportunity Zones. Governor Rick Scott submitted a list of 427 potential Opportunity Zones, featuring at least one in every Florida county. Last June, the U.S. Department of the Treasury certified the list, designating all nominated tracts as Qualified Opportunity Zones.
The designated zones include three tracts in Bay County, two in Jackson County, eight in Leon County, and one each in Gulf, Gadsden, Calhoun, Franklin, Holmes, Liberty, Taylor, Wakulla and Washington Counties.
But there are many more areas in the Panhandle that could benefit from an Opportunity Zone designation. Florida’s Opportunity Zone nominations have already been made and approved, but the federal law could be amended to expand it to other areas impacted by Hurricane Michael (or allow Florida to amend its list.)
There is a provision to allow 5% of tract nominations to be tracts that did not meet the current designation but were contiguous to other tracts that did meet the criteria. Florida justifiably chose not to nominate contiguous tracts in order to target the areas with the most need; however, the hurricane may have rendered some of these contiguous tracts very much in need of help.
The Opportunity Zone regulations have not yet been finalized. The Treasury Department and the IRS issued proposed regulations back in October. The deadline for public comments is December 28, 2018 and a public hearing will be held on Jan. 10, 2019. Hopefully the final regulations will be adopted soon thereafter.
If you or your company recently sold or are planning to sell appreciated assets, we urge you to explore investing in a Qualified Opportunity Fund, especially in areas impacted by Hurricane Michael. It could be beneficial to both you and your state.
We also recommend that both our current and incoming Governor, along with state lawmakers, to work with Florida’s Congressional delegation to include more areas impacted by the storm as Opportunity Zones. This could be an important tool in spurring the revitalization of these communities.
Dominic M. Calabro is president and CEO of Florida TaxWatch.