Episode 13: The Opportunity Zone Opportunity
Welcome back to “Tackling Tax,” where we’ll bring you the latest on tax policy and strategies—in an easy-to-understand format. Whether you’re looking to learn more about tax bills, global tax implications, or planning insights for your business, you’re in the right place.
Listen every other week for more from our guests, which include everyone from university scholars to industry professionals to the firm’s experienced leaders.
On this episode, we’ll explore opportunity zones, which aim to stimulate new investment in economically distressed communities. We welcome Michael Hanger, leader of the opportunity zone service at Forvis Mazars, for a look at the potential benefits.
If you have any questions or need any assistance, please reach out to a professional at Forvis Mazars.
Transcript
IRIS LAWS
On this episode, we’ll look into Opportunity Zones and how to take advantage of the incentives. We welcome Michael Hanger, partner in the Norfolk, Virginia, area and leader of the Opportunity Zone service here at Forvis Mazars. From your one stop for tax updates and analysis, I’m Iris.
DEVIN TENNEY
And I’m Devin.
IRIS LAWS
It’s Tuesday, October 28th, and this is Tackling Tax.
Before we get started with our much-anticipated guest, we always start our show with the four stories that we think might be most impactful to you. So, let’s jump right into the Fast Four stories of the week.
Congress is digging in for what’s shaping up to be a record breaking, full funding shutdown. We’ve already passed the 23-day mark of what’s currently the second longest federal government shutdown in U.S. history, and there’s no clear end in sight. According to Senator John Kennedy from Louisiana, he said, quote, “I think it’s going to be the longest shutdown in history of ever.”
With the current record standing at 34 days during the 2018 shutdown, if Kennedy is correct, that would mean the shutdown would continue for weeks. Extending the healthcare credits is a central demand for Democrats to reopen the government. While some Republicans agree that the credit should be extended, many don’t want to include a permanent extension of the credits, estimated to cost about 350 billion over ten years, to a short-term resolution to fund the government.
The GOP wants to first fund the government, then negotiate on healthcare. With open enrollment starting November 1st and Thanksgiving travel looming, tensions are high for both sides to come to a resolution.
DEVIN TENNEY
Speaking of the shutdown, with the October 15th filing deadline now behind us, many taxpayers are wondering, how is the ongoing government shutdown going to affect their returns? While the IRS is operating with a skeleton crew, with nearly half of its workforce furloughed, and most of the public facing services are paused, so that means no phone support, no walk-in assistance, and delays for anything requiring manual review.
IRIS LAWS
So, Devin, I mean, if there’s all these delays, things are happening at the IRS. Did they give any additional extensions for returns? I mean, the deadline has come and gone, but was there anything that, any grace given in light of the impact to IRS?
DEVIN TENNEY
You know, great question, Iris. Have you ever been in the middle of a blizzard and you called your work hoping that you could show up late and your employer said, no, you better make it to work on time? It’s a bit like that. Yes, the IRS is operating at a limited capacity, but taxpayers are still required, or were still required, to meet their normal reporting obligations.
So hopefully your 2024 individual tax return was timely filed by 10/15. Now, if you filed electronically, have no apparent errors with your return and you opted for direct deposit, which was now required for most, your return is likely being processed as usual and you shouldn’t see any significant delays in your refund. But for paper filers, and those expecting mailed refunds, they may face significant delays.
Now, the bottom line is that the shutdown did not change filing deadlines, but it does slow down the IRS’ ability to respond, review, and refund. Taxpayers should continue to monitor their status online and expect to wait longer times for anything outside the automated pipeline.
IRIS LAWS
Tariffs are back in focus, contributing nearly 200 billion in revenue and helping trim the deficit by 2% thus far. Starting November 1st, new tariffs will apply to imported medium and heavy-duty vehicles. Most trucks will face a 25% tariff unless they meet USMCA rules, and buses will be subject to a 10% rate. Domestic manufacturers receive a modest offset, but the broader implication for supply chains and pricing remains uncertain.
DEVIN TENNEY
Iris, what’s going on with the Supreme Court hearing?
IRIS LAWS
Yeah, Devin, that’s a great question. And the Supreme Court is scheduled to hear arguments on November 5th in the case challenging the constitutionality of President Trump’s imposition of broad tariffs under IEEPA. That outcome could have significant implications for how this and future administrations can influence trade.
DEVIN TENNEY
And the Treasury and IRS recently rolled out four updates that I think are worth knowing. So first, we have revenue ruling 2025-21, and that set official rates for November, including the section 7520 rate for valuing trust and annuities, and the section 382 rate for corporate ownership changes. These numbers matter for estate planners and corporate tax teams working to restructure or enter family loans.
So next, we have some proposed regs that were released that aim to simplify how we determine if qualified investment entities are considered domestically controlled under FIRPTA or not. Third, notice 2025-57 gives auto lenders a grace period for reporting interest under the new OB3 deduction. Taxpayers can now deduct up to $10,000 in interest on qualifying vehicle loans, but only for cars that were assembled in the U.S.
The IRS will not penalize lenders in ‘25 if they provide basic interest statements while systems, you know, catch up with these revised changes. And lastly, the IRS released a new set of FAQs addressing the impact of OB3 on the ERC, including refund eligibility, claim filing, timing, and disallowance of appeals.
Now, as an aside, I know there is growing frustration and concern about the lack of guidance on employer requirements for the no tax on tips and overtime reporting in 2025. Please know that the IRS has received a deluge of comments, and they’re actually holding a telephonic hearing as I speak at this moment, so hopefully we will be receiving some guidance here very soon that can answer a lot of the questions that we have.
IRIS LAWS
On today’s segment of Planning Insights, we’re joined by Michael Hanger. Michael has been with the firm since 2008 and is a partner in the Norfolk, Virginia, office. Personally, back in the day, I’ve been able to work with him on some of the firm’s real estate clients, but today we are here to talk with him about his work with Opportunity Zones.
So, welcome to Tackling Tax, Michael.
MICHAEL HANGER
Thank you for having me. It’s good to be here.
IRIS LAWS
So let’s step back for a minute and talk about what Opportunity Zones are just sort of high level. Can you give us some background?
MICHAEL HANGER
Absolutely. So, Opportunity Zones came into place with the Tax Cuts and Jobs Act of 2017. The goal of the program was to stimulate new investment in economically distressed communities. So, similar to the New Markets Tax Credit, there were provisions that were put in place that drove new investment into these economically distressed communities. And then there were certain reporting requirements, or compliance requirements, that these investments had to maintain through that period.
DEVIN TENNEY
So, Michael, you talk about economically distressed communities. How are those identified? Is this like a state-by-state basis? And how am I, as a taxpayer who could, you know, participate in Opportunity Zone credits, how would I find one of these Opportunity Zones?
MICHAEL HANGER
So, what they did when they initially put the program in place is they pushed back to each state, and the governor of each state was responsible for identifying the tracts that they would nominate, in effect, for this Opportunity Zone designation. That took place shortly after the implementation of the program, so back in 2018 is when all of this was happening, and those designations were ultimately put in place by the governors of each state.
So, each state has their own Opportunity Zones within the state. And then they were certified by the Internal Revenue Service. The IRS then maintains a map of all of these designated areas. Under current law, the designations that were put forth back in 2018 are still in effect, although it is important to note that they are going to be looking at those designations beginning in 2026, for possibly new maps being drawn effective January 1st, 2027. But if anyone is interested in the map or where they might be able to find an Opportunity Zone, they can go on to the IRS website where they will have a map of all of the different zones.
IRIS LAWS
Well, that seems relatively easy then, you can kind of just go online and find them. So, we’ve identified what they are, kind of why do we care? You know, most of our listeners are business owners, CFOs, managers of businesses, that kind of thing. Like what’s the bottom line here? What incentives are available for them?
MICHAEL HANGER
Sure. Well, we’ll focus primarily on the tax benefits to the program. So there are ultimately three benefits that were put in place by this program. The first was gain deferral. And I do mean gain deferral. So it could be a long-term gain. It could be a short-term capital gain. But ultimately it had to be a gain.
We’ve had a lot of clients or taxpayers that have called us and requested information on investing in an opportunity zone. They found a great investment within an opportunity zone. They want to participate, but ultimately they don’t have any gains that they would be able to defer. Well, unfortunately, they can make that investment, but they’re not going to get these benefits.
So, I do think we have to start with that point that there is a gain deferral provision. But that’s the number one benefit. If you have a gain, you can defer it for a period of time after you make the investment. The second is a basis adjustment related to your gain deferral. So, for example, if you defer $100,000 of gain you could get a 10% basis adjustment on that or $10,000.
So there’s a basis adjustment as another benefit. The third benefit is really the one that is the focus of this program. And I think the one that most business owners are going to be truly interested in and that is a tax exclusion on investments made into these opportunity zones, as long as you meet the 10-year holding requirement.
The first two are short-term or in some cases fairly small benefits, that third one, that gain exclusion or the tax exclusion after you’ve held that investment for ten years‚ has the opportunity to be truly significant for business owners.
DEVIN TENNEY
So, Michael, let me make sure I understand. It’s a little technical and we have a lot of moving parts. So we have a gain deferral, long-term or short-term. If I have stock, let’s say in a startup, I sell it and whether or not I’ve, you know, have long-term gain or I recently got that stock and have some short-term gain, I could then invest this into an Opportunity Zone, potentially increase my basis in that by 10% with this 10-year holding period, though, does that mean if I sell or, you know, maybe if you could give me a little bit of like an illustration or example of how this actually works from a practical standpoint? Would I sell my interest in the Opportunity Zone, or how do I meet this 10-year holding requirement? And does that mean that none of the gain is taxed?
MICHAEL HANGER
Sure. That’s a great question, and it can be a little bit confusing. So I think an example is probably the perfect way to talk, to think through this at a high level. So let’s say that you sell the stock and it could be any stock that you hold individually.
It could be stock that you help your company, or it could be something else that triggered a capital gain. And let’s say that you have $1 million of gain that you would have otherwise recognized on your tax return. By making this investment and the election that you’re making, you can now defer that million dollars of gain that you would have other otherwise recognized and paid tax on.
So now you’ve deferred the gain. You’ve got this money, this million dollars in a new investment. If you hold that investment for a short period of time, under the old rules, it was either a five-year holding period or a seven-year holding period. You would get a basis adjustment and that’s that 10% that we were referencing earlier.
So, in that case, if you had $1 million gain, then $100,000 of that deferred gain would effectively go away. You’re going to get a basis adjustment of 10%. So, now all you have to worry about is the remaining $900,000 of gain. Once again, the first provision or the first benefit was that this is a deferral. It is not a permanent deferral of the gain. It is a temporary deferral of the gain.
So, under the original program that came out under the Tax Cuts and Jobs Act, if you made an investment in an Opportunity Zone, you had until December 31st, 2026 to defer that gain. So we have a lot of taxpayers out there who deferred under this original program that were going to have a fairly significant tax bill that they’re going to, that will come with the 2026 tax filing.
But you do get that 10% basis adjustment. So your original investment was $1 million. Now you’ve got an $100,000 basis adjustment. On December 31st, 2026, you may be recognizing a $900,000 gain from your original defer. At that point, you have now recognized the original $900,000 of gain, but you have $1 million investment in this new Opportunity Zone fund.
Now, let’s say that over the next however many years, up until you’ve met that 10-year holding period requirement, that investment, the value of that investment goes up to $5 million. So, your original investment was a million, but now it’s worth 5 million. That additional $4 million is what we’re talking about as being potentially fully excluded from tax.
MICHAEL HANGER
So that’s where that real benefit is. If you can find an investment that you feel like will have significant appreciation over the next 10 years, then that’s a way to fully exclude that gain from tax in the long run.
DEVIN TENNEY
I see; that actually makes a lot of sense. We see a similar concept with FICA taxation under the special timing rule where wages are still subject to FICA, but any appreciation on wages that were taxed when they vested will not be subject to FICA, so that’s actually, there is a lot of benefit there, then if we’re looking at a high-growth opportunity. One quick question I had, if I did invest it with short-term gain, will it always retain that short-term character or is there, you know, an opportunity for that short-term character to become long-term?
MICHAEL HANGER
It would be great if that were the case. But no, it actually is going to retain it for that full deferral. So, when you think about the original deferral that took place, whatever the character was of that gain when you originally deferred, it will be what you recognize in 2026. So, if it was a short-term gain that you would have recognized absent the deferral through this Opportunity Zone program, then on December 31st, 2026 you will once again recognize a short-term gain.
So, this is not a mechanism for shifting short-term to long-term. It’s only a mechanism for deferring the overall gain. But it will retain the character.
IRIS LAWS
But like a huge opportunity. So, I mean, my next question is, is this just for corps? Is it for partnerships? Can individuals take it? Like, does it matter who the taxpayer is, what type of taxpayer this is?
MICHAEL HANGER
So it can benefit a corporation, a corporation could benefit from this. An individual could benefit from this. Flow-through entities can benefit from this. Often in real estate we have discussions around another deferral concept which is a 1031 exchange. High level, that 1031 exchange does allow you to defer your gain, provided you invest it in suitable replacement property.
The downside to the 1031 provisions is you’re very, it’s not very flexible in terms of how you would ultimately make that replacement investment. If a partnership is the entity that would have the gain, it’s ultimately the partnership that would have to make that new investment.
The Opportunity Zone roles really provide a lot of flexibility. So, you do get, you can have C-corporations that could benefit from this provision by investing proceeds from gains into the Opportunity Zone program. It could be individuals, who the example used earlier was a sale of stock. It could be a sale of stock, or it could be a partnership or another flow-through entity, an S-corporation where the partnership, and this is a very common example for us, maybe the partnership recognizes a significant gain on a sale and then they can make the decision.
Will it be the partnership that will ultimately invest in the Opportunity Zone and be able to defer gain at the partnership level? Or do you allow the partnership to push that gain through to the individuals and allow them to make decisions on their own, based on their own tax situation, on whether or not they want to recognize the gain or defer it through an investment in an Opportunity Zone? So, there really is a tremendous amount of flexibility with this program.
DEVIN TENNEY
Is there like a specific vehicle to participate in these Opportunity Zones that you have to invest in that vehicle? Or is it like a direct investment from a taxpayer into this zone?
MICHAEL HANGER
It’s a great question. It is a little bit of a complex topic in terms of structuring these. And there are ways that we can maximize the benefit and perhaps reduce some of the compliance burden on taxpayers based on how it’s structured. But high level, the investment needs to be into what’s referenced as a Qualified Opportunity Fund. Now, there are different ways to structure that fund. Most typically, I would say most typically we’re seeing those as partnership structures.
And then there’s ultimately different ways that the Opportunity Fund can hold its investment. So, there are ways that we would recommend generally that these investments be structured. But ultimately it is going to be an investment in a qualified opportunity fund.
DEVIN TENNEY
Understood. So you had mentioned that this is one of the items that came about under the TCJA, and I would say a big component of OB3 is it didn’t add necessarily a lot of new things like TCJA did across the board, but it really modified a lot of existing TCJA provisions, especially those that were about to sunset, as you had just mentioned with the 12/31/26 deadline. So, can you talk a little bit about how the OB3 has impacted Opportunity Zones and maybe what that opportunity now represents for those that are still interested in working with this credit?
MICHAEL HANGER
Sure. And at the end of the day, I think this is why we’re having this conversation today. Because of the short time frame under the Tax Cuts and Jobs Act, there were a lot of limitations for potential investors, investors who would say, I would love to make an investment in an Opportunity Zone. But this is a very big decision and because of the short time frame that I have to make the decision, I ultimately won’t be able to really benefit from this program.
The biggest change with OB3 is the permanency of the rules. And to make the rules permanent, they did have to make some changes to ultimately how the program is administered, but that is really the key. And so, I think now because it is a permanent provision, taxpayers are going to be able to really think through whether or not Opportunity Zone investments make sense to them.
The ability to, the change to the permanency did require that they move from the program they had before, which was a fixed date compliance period where investments had to be made before December 31st, 2026, and then the deferral period ended on that date and moved to more of a five-year rolling period.
But I think overall that’s going to simplify things for a lot of taxpayers. Some of the other changes that it implemented, previously there was a fairly complex holding period requirement for the basis adjustment. Under certain circumstances there would be a 10% basis adjustment. And if you held it for seven years, it would move up to a 15% basis adjustment.
OB3 simplified that by basically changing to a five-year deferral period with a 10% basis adjustment. So, I think it simplified the provision in that context. The other thing that it did is it added a new Rural Opportunity Zone program and actually increased the incentives for investing in one of these Rural Opportunity Zones. Under the original program, we saw that most of the census tracts that were designated were in urban areas.
And that’s where most of the investment dollars went. There was clearly an effort this time around to shift some of those dollars to rural investments. And so, not only did they create this new Rural Opportunity Zone Fund program, but they increased the incentives from a 10% basis adjustment to a 30% basis adjustment for those investments. And then finally, they just added in some additional reporting requirements, mainly so Congress would be able to track the program overall and the benefits that it was helping pass on.
IRIS LAWS
So, a good number of changes. I think, actually, to take you back to the first one with the rolling time frame, that one has always kind of confused me for some reason. Can you talk about that just a little bit more? And maybe the impact of what that changes practically?
MICHAEL HANGER
I think it may be helpful to contrast it a little bit with the old rules, or the rules are put in place under the Tax Cuts and Jobs Act. So, as we’ve talked about before, to qualify under the Tax Cuts and Jobs Act, you had to make an investment during this period of time, effective January 1st, 2018 through December 31st, 2026. To be able to be qualified for that 10% basis adjustment, you had to hold the investment for at least five years.
Well, if the program ends on December 31st, 2026, then that meant that you had to make your investment in the Opportunity Zone by December 31st, 2021, ultimately, to meet that five-year period. That became problematic for a lot of investors when thinking through it, because it does take time to make those decisions to become a little more well-versed on the Opportunity Zone program and make the decision that you want to invest.
So, because of the short window of time from January 1, 2018 to December 31st, 2021, to get that benefit, it really did limit some of the effectiveness of the program. So, instead, what they did in this case, rather than creating a fixed window of time, they created a five-year rolling. So, previously, regardless of when you made an investment in an opportunity zone, whether it was January 1st, 2018 or middle of the year in 2023, your deferral period ran through December 31st, 2026.
So, everyone who invested in the program under the Tax Cuts and Jobs Act will recognize the gain from that deferral on the same date, December 31, 2026. The five-year rolling effectively allows a period of time beginning on the date of the investment. It allows you to defer that gain for five years for everyone, and it starts when you make that investment.
So ultimately, you are, every taxpayer who invests in an Opportunity Zone is going to have their own five-year window. And the deferral will last until the end of that five-year period, and that’s when they’ll be recognizing that gain. It certainly allows for a lot of flexibility in terms of when you make the investment and the benefits that you’re going to get.
It is important to note that this is effective January 1st, 2027. So, an investment will have to be made after that period to be eligible for the five-year deferral.
DEVIN TENNEY
Okay. So that’s not a retroactive application and it’s only prospective.
MICHAEL HANGER
So, we’re in this in-between period right now where if you were to make an investment in an Opportunity Zone program today, your deferral would only go until December 31st, 2026. If you can wait to make that investment until January 1st, 2027, then you’ll get a five-year deferral.
DEVIN TENNEY
Yeah, I’m a little surprised that that’s how they structured it, but, hey, at least it sounds like we do have some really meaningful and substantial benefits with the new changes, especially with the Rural Opportunity Zone program. So, Michael, do you have any big, like, what are the primary big takeaways for our listeners? I think that was one of them that you just mentioned. But what are some of the actionable steps that they probably should be thinking about or taking right now?
MICHAEL HANGER
That’s a great question. I think we can break this down into a couple of buckets. One is just a reminder if, for any of the listeners who made an investment under the original Opportunity Zone program that came into place with the Tax Cuts and Jobs Act, we have until December 31st, 2026. That’s when that deferral period ends. So, I would certainly hope that most people are considering the cash flow needs that would come from making those tax payments that would be due April 15th, 2027. So, I certainly know that a lot of our clients are considering that cash obligation that they will have at that period.
So, that is a key one. And I would make a note that if you happen to have made an investment in an Opportunity Zone and the investment didn’t go as well as planned, so in other words, you made the investment in the opportunity, let’s say you put $1 million in, but now, because for whatever reason, that investment is only worth $750,000, it is important to note that the gain that is deferred is the lesser of the original gain deferral or the fair market value of the investment.
So, if you feel like you’ve got an investment that has gone down in value for whatever reason, then it is worth considering that provision to see if you can’t reduce your tax obligation based on the December 31st, 2026 recognition period. So that’s kind of trying to put a bow a little bit on the original program.
And as that is in kind of the wind-down phase at this point, moving to the new program under OB3, really I think the key takeaways are the permanency, as mentioned earlier, under the original program, because of the limited time frame, it really made it difficult for business owners to make long-term investment decisions that worked well within the Opportunity Zone program.
Now, because of the permanency of the rules, I think it gives business owners an opportunity to consider opportunities and investments as part of their overall business strategy. And I think it also gives time, and we all know how long some of these developments can take to implement. And so, I think it also gives business owners an opportunity to work with state and local leadership to develop projects that will maximize the benefits to the economically distressed communities that, ultimately, this program was designed to help.
IRIS LAWS
Well, what a great conversation, Michael. Thank you so, so much for joining. I think it’s all a little bit clearer to me. It’s a complicated one. But what a benefit potentially for the folks listening. So, thanks for joining. And we hope to hear from you in the future.
MICHAEL HANGER
Once again, thank you for having me. And you know, certainly I’m happy to help anyone who would want to think through the Opportunity Zone program.
DEVIN TENNEY
Thank you, Michael.
IRIS LAWS
And with that, we’ll take you to the Focused FORsight of the week.
DEVIN TENNEY
Each episode will bring you what we call a Focused FORsight of the week, an article or webinar that might be of interest to you. This week’s Focused FORsight is an article written by our guest today, Michael Hanger, and it is titled “Opportunity Zone Changes and the New 2025 Tax Act.” Take a look for an easy and digestible quick reference to some of the topics that we talked about today.
IRIS LAWS
And that’s our show. Thanks for joining. Remember to subscribe and listen in for the next episode of the podcast. Until next time.
ANNOUNCER
The information set forth in this podcast contains the analysis and conclusions of the panelists based upon his, her, or their research and analysis of industry information and legal authorities. Such analysis and conclusions should not be deemed opinions or conclusions by Forvis Mazars or the panelists as to any individual situation as situations are fact-specific. The listener should perform their own analysis and form their own conclusions regarding any specific situation. Further, the panelists’ conclusions may be revised without notice, with or without changes in industry information and legal authorities.