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On March 3, 2020, Wisconsin Gov. Tony Evers signed into law A.B. 532, doubling certain incentives available to businesses located in Wisconsin Opportunity Zones for taxable years beginning after 2019.1
The Wisconsin Economic Development Association championed the bill to accelerate investment in “capital starved communities,” and legislators hope the bill will help combat the state’s labor shortage.2
United in achieving their goal, the legislation was approved by a unanimous vote in the Assembly and a 26-7 bipartisan vote in the Senate.
Federal Opportunity Zone benefits
A.B. 532 is designed to work in tandem with existing federal Opportunity Zone incentives to maximize the benefits available to businesses. The federal Opportunity Zone Program allows businesses to defer capital gains taxes from asset sales. If a business re-invests its capital gains in a Qualified Opportunity Fund within 180 days, it may be able to defer and decrease its capital gains taxes. Under federal law, a Qualified Opportunity Fund is a fund that holds at least 90% of its assets in federal Opportunity Zone Properties. Opportunity Zone Properties are generally those located in designated low-income areas, in the state’s most economically challenged communities.
The length of time a business maintains its investment in an Opportunity Fund determines how much, if any, of the deferred taxes may be excluded. Capital gains tax will be deferred until the business sells its investment in the Opportunity Zone Fund or until December 31, 2026. If a business holds its Opportunity Zone Fund investment for at least five years, it may exclude 10% of its deferred gain. If the investment is held for at least seven years, 15% of the deferred gain is excludible. Further, if a business holds its investment in the fund for at least 10 years, it will not be taxed on any additional capital gains from the original investment.3
Incentivizing re-investment in Wisconsin
Under Wisconsin law, a qualifying Opportunity Fund must hold at least 90% of its investments in federal Opportunity Zone Properties located in Wisconsin.4
If a business wants to maximize its Opportunity Zone benefits, it must re-invest its capital gains in a fund with at least 90% of its investments in Wisconsin Opportunity Zone Properties.
Wisconsin Opportunity Zone incentives also allow businesses to defer income taxes until they sell their investment in the Opportunity Zone Fund. Prior to A.B. 532, for taxable years beginning in 2016 and thereafter, a business that held its Opportunity Zone Fund investments for at least five years could exclude 10% of its deferred gain from state taxation. Further, a business that held its investments for at least seven years could exclude 15% of its deferred gain. Finally, a business that held its investments for at least 10 years could exclude 100% of its deferred gain and any earnings.5
A.B. 532 doubles the amount of deferred gains that may be excluded from state tax for investments held for five or seven years. A business holding an investment in the Opportunity Zone Fund for five years may now exclude 20% of the deferred gain. A business holding an investment in an Opportunity Zone Fund for at least seven years may exclude up to 30% of the deferred gain.6
By utilizing A.B. 532, businesses can maximize their Opportunity Zone benefits by re-investing in a fund with at least 90% of their investments in Wisconsin Qualified Opportunity Zone Properties. Businesses that re-invest in Wisconsin Opportunity Zone Funds may be able to defer federal capital gains tax on the re-invested funds until Dec. 31, 2026. Businesses will have the additional benefit of being able to exclude up to 20% of the deferred gain from Wisconsin tax for investments held for at least five years and 30% from Wisconsin tax for investments held for at least seven years. Lastly, businesses will not be taxed on the appreciation of their investment by the Internal Revenue Service or the Wisconsin Department of Revenue.
While the purpose of Opportunity Zone incentives is to drive private investment in economically disadvantaged areas of the United States, Wisconsin’s new tax treatment of these investments is one extra step to drive the investment locally. Specifically, by doubling the allowed reduction of capital gains at a state level for property held for at least five or seven years, this will likely encourage Wisconsin investors to re-invest in their own communities. Since the announcement of Opportunity Zone incentives in the United States, implementation has been limited. Increasing the value of the incentives may create more opportunities for investors to participate in the program.
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